Idiosyncratic Risk and Returns in International Equity Markets

41 Pages Posted: 13 Dec 2002

See all articles by Kevin C.H. Chiang

Kevin C.H. Chiang

University of Alaska Fairbanks - School of Management (SOM); Louisiana State University, Baton Rouge - Department of Finance

Ashley W.P. Kung

DRAMeXchange

Date Written: September 10, 2003

Abstract

The traditional mean-variance asset pricing approach posits that in equilibrium only market risk matters. This study finds counterevidence in international equity markets. Specifically, this paper shows that average idiosyncratic volatility predicts world premium. Marginal investors appear to endure idiosyncratic risk, view idiosyncratic risk as a relevant component of risk, and demand a risk premium for bearing the risk. This study then extends the analysis to individual national markets. The results show that a large number of national markets have significant exposures to the mimicking portfolio of individual idiosyncratic volatility. The distribution of the exposures suggests that location may play an important role in pricing idiosyncratic risk.

Keywords: Idiosyncratic Risk, International Finance, Asset Pricing

JEL Classification: G12, G14, G15

Suggested Citation

Chiang, Kevin C.H. and Kung, Ashley W.P., Idiosyncratic Risk and Returns in International Equity Markets (September 10, 2003). Available at SSRN: https://ssrn.com/abstract=336662 or http://dx.doi.org/10.2139/ssrn.336662

Kevin C.H. Chiang (Contact Author)

University of Alaska Fairbanks - School of Management (SOM) ( email )

P.O. Box 756080
208C Bunnell Building
Fairbanks, AK 99775-0500
United States
907-474-7049 (Phone)
907-474-5219 (Fax)

Louisiana State University, Baton Rouge - Department of Finance ( email )

E.J. Ourso College of Business Administration
Baton Rouge, LA 70803
United States
225-753-4978 (Phone)
225-388-6366 (Fax)

Ashley W.P. Kung

DRAMeXchange ( email )

9F, No. 563 Sec. 4
Chung Hsiao E. Rd.
Taipei
Taiwan

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