Does Idiosyncratic Risk Matter for Individual Securities?

Authors

  • Nadia Vozlyublennaia

    1. Nadia Vozlyublennaia is an Assistant Professor in the Area of Finance, College of Business Administration, Texas Tech University in Lubbock, TX.
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  • We are grateful to Bill Christie (Editor) and an anonymous referee, as well as Texas Tech University seminar participants, for valuable comments and suggestions.

Abstract

This paper investigates the relationship between idiosyncratic risk and returns for individual securities within a generalized autoregressive conditional heteroskedascticity (GARCH)-in-mean framework. We demonstrate that, on average, 15% of stocks exhibit a significant relationship between returns and risk, of which 9% are positive. These proportions vary over time and with model specifications. Some characteristics influence the probability of a positive and a negative relationship, while others appear to affect only one, but not the other. This evidence implies that the factors that explain a positive connection between idiosyncratic risk and returns are different from the factors that explain a negative connection.

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