Idiosyncratic Volatility and Stock Returns: A Cross Country Analysis

Posted: 20 Jan 2009

See all articles by Kuntara Pukthuanthong

Kuntara Pukthuanthong

University of Missouri, Columbia

Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance

Date Written: January 12, 2009

Abstract

Empirical evidences regarding the association of idiosyncratic volatility and stock returns are inconsistent with the capital asset pricing model (CAPM) which implies that idiosyncratic risk should not be priced because it would be fully eliminated through diversification. Using estimated-EGARCH conditional idiosyncratic volatility of individual stocks across 36 countries from 1973 to 2007, we find that idiosyncratic risk is priced on a significantly positive risk premium for stock returns. The evidence is statistically and economically significant. It overwhelmingly supports the prediction of existing theories that idiosyncratic risk is positively related to expected returns.

Keywords: Idiosyncratic risk, CAPM, Stock returns

JEL Classification: G12, G15

Suggested Citation

Pukthuanthong, Kuntara and Visaltanachoti, Nuttawat, Idiosyncratic Volatility and Stock Returns: A Cross Country Analysis (January 12, 2009). Applied Financial Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1326714

Kuntara Pukthuanthong (Contact Author)

University of Missouri, Columbia ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States
6198076124 (Phone)

HOME PAGE: http://https://kuntara.weebly.com

Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance ( email )

School of Economics and Finance
Private Bag 102904, NSMC
Auckland
New Zealand
64 9 414 0800 (43169) (Phone)
64 9 441 8177 (Fax)

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