Idiosyncratic Risk and Returns in International Equity Markets
41 Pages Posted: 13 Dec 2002
Date Written: September 10, 2003
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: Suggested Citation