Price nonsynchronicity, idiosyncratic risk, and expected stock returns in China

Abstract

We are the first to examine the pricing of relative idiosyncratic risk, or price nonsynchronicity, in the Chinese equity market. Using several tests, we investigate returns on more than 2700 companies in the period 1998 to 2018. Contrary to the U.S. evidence, price nonsynchronicity negatively predicts future returns in the cross-section. A value-weighted strategy going long (short) the quintile of least (most) synchronised stocks produces a negative monthly six-factor model alpha of −0.61%. Also, we demonstrate that the effect is driven by the low-idiosyncratic volatility anomaly. Once the absolute idiosyncratic risk is taken into account, the nonsynchronicity becomes irrelevant for future returns.