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Keywords:

  • emerging markets;
  • idiosyncratic risk;
  • tracking error volatility
  • C13;
  • G10;
  • G11

Abstract

In this study, I examine the properties and portfolio management implications of value-weighted idiosyncratic volatility in 24 emerging markets. This paper provides evidence against the view that the rise of idiosyncratic risk is a global phenomenon. Furthermore, specific and market risks jointly predict market returns as there is a negative (positive) relation between idiosyncratic (market) risk and subsequent stock returns. Idiosyncratic volatility is the most important component of tracking error volatility, and it does not exhibit either an upward or a downward trend. Thus, investors do not have to increase, on average, the number of stocks they hold to keep the active risk constant.