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When Does Idiosyncratic Risk Really Matter
| Content Provider | Semantic Scholar |
|---|---|
| Author | Ruan, Tony Sun, Qian Xu, Yexiao |
| Copyright Year | 2010 |
| Abstract | In contrast to the current literature, we provide new evidence supporting a positive relation between idiosyncratic risk and the expected future market return. Since a large part of the idiosyncratic risk can be diversified away easily, the conventional aggregate idiosyncratic risk measures can only be noisy proxies for the undiversified idiosyncratic risk, which may be priced according to Merton (1987). We thus propose a simple noise reduction method that includes two different noisy measures (dual-predictor) in the same predictive regression to reexamine the relation. We show that the noise effect tends to cancel out in our framework due to the highly correlated noise components of the two measures. In particular, our dual-predictor alone explains future market returns with an adjusted R^2 of 4%. Such a large predictive power is economically significant and robust to the inclusion of other popular predictors and to the choices of sample periods and additional market indices. |
| File Format | PDF HTM / HTML |
| DOI | 10.2139/ssrn.1561262 |
| Alternate Webpage(s) | http://www.fdsm.fudan.edu.cn/UserWebEditorUploadImage/WthvSw6ubxU/IVTime092010_ruanedted.pdf |
| Alternate Webpage(s) | http://econfin.massey.ac.nz/school/documents/seminarseries/manawatu/tonyruan.pdf |
| Alternate Webpage(s) | http://www.wise.xmu.edu.cn/Master/News/NewsPic/2010929171432418.pdf |
| Alternate Webpage(s) | https://doi.org/10.2139/ssrn.1561262 |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
