Idiosyncratic Risk Matters!

Goyal, Amit; Santa-Clara, Pedro

doi:10.1111/1540-6261.00555

Cited by 956 publications

(482 citation statements)

References 101 publications

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“…Some studies (Bali et al (2005), Huang et al (2010), among others) suggest idiosyncratic risk is not priced. In other studies, both negative (Ang, et al (2006), Guo and Savickas (2010) and positive relations (Goyal and Santa-Clara (2003), Diavatopoulos, Doran, and Peterson (2008), Malkiel andXu (2006), Fu (2009)) are documented. In a recent study, Fu (2009) demonstrates that the commonly used ordinary least square (OLS) method may not be appropriate to calculate idiosyncratic risk since idiosyncratic volatility does not follow a random walk.…”

Section: Introductionmentioning

confidence: 80%

Equity Anomalies and Idiosyncratic Risk Around the World

Fan¹,

Opsal²,

Yu³

2015

MFJ

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In this study, we examine how idiosyncratic risk is correlated with a wide array of anomalies,including asset growth, book-to-market, investment-to-assets, momentum, net stock issues, size, and total accruals, in international equity markets. We use zero-cost trading strategy and multifactor models to show that these anomalies produce significant abnormal returns. The abnormal returns vary dramatically among different countries and between developed and emerging countries. We provide strong evidence to support the limits of arbitrage theory across countries by documenting a positive correlation between idiosyncratic risk and abnormal return. It suggests that the existence of these well-known anomalies is due to idiosyncratic risk. In addition, we find that idiosyncratic risk has less impact on abnormal return in developed countries than emerging countries. Our results support the mispricing explanation of the existence of various anomalies across global markets. (JEL: G12, G15) Keywords: anomalies, idiosyncratic risk, international equity markets, limits of arbitrage * Corresponding author, Tel: 1-262-472-6943, Email: fanz@uww.edu. We received valuable comments and suggestions from three anonymous referees and editors Panayiotis C. Andreou and Panayiotis Theodossiou. All mistakes and errors remain to be our own responsibility.

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Section: Introductionmentioning

confidence: 80%

Equity Anomalies and Idiosyncratic Risk Around the World

Fan¹,

Opsal²,

Yu³

2015

MFJ

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“…Their empirical evidence suggests that idiosyncratic risk commands a positive risk premium. Goyal and Santa-Clara (2003) claimed that the average stock variance is positively related to market returns, but Ang et al (2009) showed that stocks with high idiosyncratic risk deliver abysmally low returns. Guo and Savickas (2008) and Kearney and Poti (2008) found that market returns are positively related to lagged market variance and negatively related to lagged idiosyncratic variance in US.…”

Section: Introductionmentioning

confidence: 99%

Does Idiosyncratic Risk Matter? Evidence from the Japanese Stock Market

Xiao

2015

EJBM

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It would seem that a relationship exists between the idiosyncratic risk and stock returns, and the idiosyncratic risk exhibits a positive and statistically significant trend. The goal of this paper is to use data from Japanese markets to investigate the two issues for the 2000-2014 period and provide further evidence that adds to the existing conflicting results. Our results suggest that existence of a positive relationship between the equally weighted measure of idiosyncratic risk and subsequent stock returns, but we don't find a rise in idiosyncratic volatility over the period.

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“…This is to say that the variance of a security includes both systematic and specific portion of risk, the sum also known as "Total Risk" (Elton et al, 2003;Goyal and Santa Clara, 2003). Both measures are well established in the finance literature with higher values corresponding to riskier securities.…”

Section: Variable Measurementmentioning

confidence: 99%

Does Intellectual Capital Affect the Volatility of Returns? An Empirical Investigation on Italian Listed Companies

Cantrell

Coluccia

Fontana

et al. 2017

American Journal of Applied Sciences

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Abstract:In modern information economies, economic success increasingly depends on the ability to apply knowledge and to transform it into firm value. While intellectual capital plays a critical role in firm success, it is an intangible asset that is difficult to measure and that is unrecorded by the firm. Difficulties in measuring intellectual capital, as well as the dynamic nature of the firms that rely on it, may lead to greater stock market volatility/risk. Consistent with this expectation, in statistical tests we find that intellectual capital, measured by VAIC, positively relates to the volatility of stock returns section among Italian listed companies. We find this positive relation for two components of a firm's risk: systematic risk and specific risk. The finding is relevant to both investors concerned with understanding the risk/reward balance of particular investments and regulators concerned with market stability.

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Idiosyncratic Risk Matters!

Cited by 956 publications

References 101 publications

Equity Anomalies and Idiosyncratic Risk Around the World

Equity Anomalies and Idiosyncratic Risk Around the World

Does Idiosyncratic Risk Matter? Evidence from the Japanese Stock Market

Does Intellectual Capital Affect the Volatility of Returns? An Empirical Investigation on Italian Listed Companies

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