LAUSR

Is idiosyncratic volatility priced? The existing literature finds conflicting results on the cross-sectional relation between expected returns and idiosyncratic volatility. This paper examines the relation between idiosyncratic volatility and expected returns in Chinese Stock Market. We find there is a significantly positive relation between idiosyncratic volatility and expected returns when we use Fama–French five-factor model to estimate idiosyncratic volatility. However, the positive relation disappears when we use GARCH (1,1) model to estimate idiosyncratic volatility. This result indicates that in Chinese Stock Market, the idiosyncratic volatility premium is just an apparent phenomenon, whether the idiosyncratic volatility matter or not depend on the way we estimate the idiosyncratic volatility. The result is robust after controlling for investors’ lottery preference, investors’ sentiment and other factors.