Is Idiosyncratic Risk Priced? The International Evidence

50 Pages Posted: 21 Mar 2009 Last revised: 10 Dec 2020

See all articles by Paul Brockman

Paul Brockman

Lehigh University - College of Business

Tao Guo

Morningstar, Inc. - Morningstar Investment Management LLC

Maria G. Vivero

The University of Dayton

Wayne Yu

City University of Hong Kong

Date Written: July 11, 2009

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 firmmonth
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, idiosyncratic risk premiums are larger in countries
with less developed financial markets, higher transaction costs, and larger market shares of
neglected stocks.

Keywords: Idiosyncratic risk, Expected returns, Pricing, International markets

JEL Classification: G12, G15

Suggested Citation

Brockman, Paul and Guo, Tao and Vivero, Maria Gabriela and Yu, Wayne, Is Idiosyncratic Risk Priced? The International Evidence (July 11, 2009). Available at SSRN: https://ssrn.com/abstract=1364530 or http://dx.doi.org/10.2139/ssrn.1364530

Paul Brockman

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

Tao Guo

Morningstar, Inc. - Morningstar Investment Management LLC ( email )

22 W Washington Street
Chicago, IL 60602
United States

Maria Gabriela Vivero (Contact Author)

The University of Dayton ( email )

300 College Park
Dayton, OH 45469
United States
937-229-3458 (Phone)

Wayne Yu

City University of Hong Kong ( email )

Kowloon
Hong Kong

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