Idiosyncratic Volatility of Small Public Firms and Entrepreneurial Risk
58 Pages Posted: 21 Mar 2006
Date Written: December 2005
Abstract
The average idiosyncratic volatility of small public firms is a positive predictor of future stock returns. This is true for returns of both large and small firms. We consider several economic arguments for this result, including a liquidity premium, and we rule out all but one of them. Our evidence supports the entrepreneurial risk hypothesis, which states that small firms' idiosyncratic risk is a proxy for risk faced by private business owners, who also happen to be significant shareholders of stock. Expected returns are increasing functions of entrepreneurial risk, and therefore returns are predictable using proxies for this risk, which include small-firm idiosyncratic volatility.
Keywords: Idiosyncratic risk, Entrepreneurial risk, Small firms
JEL Classification: G10, G12
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Default Risk in Equity Returns
By Maria Vassalou and Yuhang Xing
-
News Related to Future GDP Growth as a Risk Factor in Equity Returns
-
News Related to Future GDP Growth as Risk Factors in Equity Returns
-
By John Y. Campbell, Jens Hilscher, ...
-
By John Y. Campbell, Jens Hilscher, ...
-
Forecasting Default with the Kmv-Merton Model
By Sreedhar T. Bharath and Tyler Shumway
-
Exchange Rate and Foreign Inflation Risk Premiums in Global Equity Returns
-
By Maria Vassalou and Yuhang Xing
-
Bankruptcy Prediction With Industry Effects
By Sudheer Chava and Robert A. Jarrow