Is idiosyncratic risk priced? The international evidence

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

3 Scopus Citations
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Author(s)

  • Paul Brockman
  • Tao Guo
  • Maria Gabriela Vivero
  • Wayne Yu

Detail(s)

Original languageEnglish
Pages (from-to)121-136
Journal / PublicationJournal of Empirical Finance
Volume66
Online published2 Feb 2022
Publication statusPublished - Mar 2022

Abstract

We find a positive and significant relation between forecasted idiosyncratic volatility and returns in a large international database covering 57 countries with over three million firm–month observations from July 1995 to June 2016. Our empirical results reveal substantial cross-country variation in the magnitude of the idiosyncratic risk premiums. Consistent with classic asset pricing theory (e.g., Markowitz (1959); Merton (1987)), we find that idiosyncratic risk premiums are positively associated with investor impediments to portfolio diversification. Specifically, the significant relation between idiosyncratic risk and returns is attenuated by stock market development, broader access to high quality information, and lower transaction costs

Research Area(s)

  • Cross sectional returns, Diversification, EGARCH, Financial development, Idiosyncratic volatility, International markets

Citation Format(s)

Is idiosyncratic risk priced? The international evidence. / Brockman, Paul; Guo, Tao; Vivero, Maria Gabriela et al.
In: Journal of Empirical Finance, Vol. 66, 03.2022, p. 121-136.

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review