Idiosyncratic volatility and liquidity risk: How they have explanatory power in stock returns

Literatures have shown that idiosyncratic volatility and liquidity risk calculated from stock markets have explanatory power in stock returns. However, only few studies focus on the stock option markets. As we know that stock options with high leverage and low costs may attract investors who contain more information. In this study, we use option trading volume as a liquidity factor to reexamine the relationship among liquidity risk, idiosyncratic volatility and stock returns. In addition, we use call and put options trading volume separately to have further discussion.
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Idiosyncratic volatility and liquidity risk: How they have explanatory power in stock returns