Is Idiosyncratic Risk Priced? The International Evidence
50 Pages Posted: 21 Mar 2009 Last revised: 10 Dec 2020
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: Suggested Citation
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