Low Risk and High Returns: Evidence from the German Stock Market
46 Pages Posted: 30 Jun 2010
Date Written: April 1, 2010
Although most of the empirical and theoretical asset pricing literature predicts a positive or no significant relationship between idiosyncratic volatility and returns, Ang et al. (2006, 2009) find that high idiosyncratic volatility stocks have low returns and vice versa. We deliver further evidence and show that the cross-section of the German stock market reeffects a negative premium for idiosyncratic risk. Even after controlling for the three Fama-French factors we estimate a significant risk premium of -0.8% per month. In addition, we undertake further robustness checks like the differentiation between upside and downside idiosyncratic volatility, the application of the (E)GARCH approach to estimate idiosyncratic risk and the use of monthly instead of daily data. However, the puzzle still prevails.
Keywords: Empirical Asset Pricing, Idiosyncratic Risk, Volatility, Risk Premium
JEL Classification: G12
Suggested Citation: Suggested Citation