We are grateful to Bill Christie (Editor) and an anonymous referee, as well as Texas Tech University seminar participants, for valuable comments and suggestions.
Does Idiosyncratic Risk Matter for Individual Securities?
Article first published online: 4 APR 2012
© 2012 Financial Management Association International.
Volume 41, Issue 3, pages 555–590, Fall 2012
How to Cite
Vozlyublennaia, N. (2012), Does Idiosyncratic Risk Matter for Individual Securities?. Financial Management, 41: 555–590. doi: 10.1111/j.1755-053X.2012.01193.x
- Issue published online: 6 SEP 2012
- Article first published online: 4 APR 2012
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.