Does idiosyncratic volatility matter in emerging markets? Evidence from China

•We find no evidence of a long-term trend in idiosyncratic volatility (IV).•The time series behavior of IV in China is episodic.•The episodic behavior is best characterized by an autoregressive process with regime shifts that coincide with structural market reforms.•There is also evidence of a negative idiosyncratic volatility (IV) effect.•Anecdotal evidence suggests that the IV effect could be driven by investor preference for high IV stocks.

We investigate the time series behavior of idiosyncratic volatility and its role in asset pricing in China. We find no evidence of a long-term trend in the time series behavior of idiosyncratic volatility. Idiosyncratic volatility in China is best characterized by an autoregressive process with regime shifts that coincide with structural market reforms. We also document evidence of a negative idiosyncratic volatility effect in China with anecdotal evidence suggesting that it could be driven by investor preference for high idiosyncratic volatility stocks.