Information in the Idiosyncratic Volatility of Small Firms
59 Pages Posted: 13 Dec 2004
Date Written: September 2004
Non-systematic volatilities of small firms are special as predictors of stock returns. They are positively related with future returns on all age and size portfolios. They dominate systematic volatility, big-firm volatility and other volatilities. And there is strong evidence that idiosyncratic risk is priced in small-firm returns. Small-firm volatility as a predictor of big-firm returns is in part a proxy for systematic volatility and consumption-wealth ratio. We rule out several hypotheses, including a liquidity premium, as potential explanations of our results, but not the idea that small-firm idiosyncratic volatility is correlated with the risk of the total investor portfolio, which includes non-equity assets.
Keywords: Idiosyncratic Risk, Systematic Risk, Small Firms
JEL Classification: G12, G14
Suggested Citation: Suggested Citation