Download or read book Idiosyncratic Risk Investor Base and Returns written by Doina Chichernea and published by . This book was released on 2018 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide empirical evidence for the incomplete information model advanced by Merton (1987), which shows that the relation between idiosyncratic volatility (IV) and expected return is conditional on the firm's investor base. Using four different proxies for investor base, we show that idiosyncratic risk premiums are larger for neglected stocks, and smaller or even economically insignificant for visible stocks. Since neglected stocks have greater IV, the total IV risk premium (price times quantity) for neglected stocks will be greater than for visible stocks. Additionally, we find a positive size effect and negative beta effect after controlling for IV, which are both consistent with Merton's model predictions. Overall, our results provide strong support for the theory that the market segmentation induced by incomplete information is an important component of the documented influence of IV in the cross-section of returns.
Download or read book Idiosyncratic Risk and Security Returns written by Yexiao Xu and published by . This book was released on 2005 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: The traditional CAPM approach argues that only market risk should be incorporated into asset prices and command a risk premium. This result may not hold, however, if some investors can not hold the market portfolio. For example, if one group of investors fails to hold the market portfolio for exogenous reasons, the remaining investors will also be unable to hold the market portfolio. Therefore, idiosyncratic risk could also be priced to compensate rational investors for an inability to hold the market portfolio. A variation of the CAPM model is derived to capture this observation as well as to draw testable implications. Under both the Fama and MacBeth (1973) and Fama and French (1992) testing frameworks, we find that idiosyncratic volatility is useful in explaining cross-sectional expected returns. We also discover that returns from constructed portfolios directly co-vary with idiosyncratic risk hedging portfolio returns.
Download or read book Investment Idiosyncratic Risk and Ownership written by Dimitris Papanikolaou and published by . This book was released on 2013 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: High-powered incentives may induce higher managerial effort, but they also expose managers to idiosyncratic risk. If managers are risk averse, they might underinvest when firm-specific uncertainty increases, leading to suboptimal investment decisions from the perspective of well-diversified shareholders. We empirically document that when idiosyncratic risk rises, firm investment falls, and more so when managers own a larger fraction of the firm. This negative effect of managerial risk aversion on investment is mitigated if executives are compensated with options rather than with shares or if institutional investors form a large part of the shareholder base.
Download or read book Idiosyncratic Risk and the Cross Section of Expected Stock Returns written by Fangjian Fu and published by . This book was released on 2013 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: Theories such as Merton (1987, Journal of Finance) predict a positive relation between idiosyncratic risk and expected return when investors do not diversify their portfolio. Ang, Hodrick, Xing, and Zhang (2006, Journal of Finance 61, 259-299) however find that monthly stock returns are negatively related to the one-month lagged idiosyncratic volatilities. I show that idiosyncratic volatilities are time-varying and thus their findings should not be used to imply the relation between idiosyncratic risk and expected return. Using the exponential GARCH models to estimate expected idiosyncratic volatilities, I find a significantly positive relation between the estimated conditional idiosyncratic volatilities and expected returns. Further evidence suggests that Ang et al.'s findings are largely explained by the return reversal of a subset of small stocks with high idiosyncratic volatilities.
Download or read book High Idiosyncratic Volatility and Low Returns written by Ajay Bhootra and published by . This book was released on 2014 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: The well-documented negative relationship between idiosyncratic volatility and stock returns is puzzling if investors are risk-averse. However, under prospect theory, while investors are risk-averse in the domain of gains, they exhibit risk-seeking behavior in the domain of losses. Consistent with risk-seeking investors' preference for high volatility stocks in the loss domain, we find that the negative relationship between idiosyncratic volatility and stock returns is concentrated in stocks with unrealized capital losses, but is non-existent in stocks with unrealized capital gains. This finding is robust to control for short-term return reversals and maximum daily return, among other variables.
Download or read book Financial Integration Entrepreneurial Risk and Global Dynamics written by George-Marios Angeletos and published by DIANE Publishing. This book was released on 2011-04 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: How does financial integration impact capital accumulation, current-account dynamics, and cross-country inequality? This paper investigates this question within a two-country, general-equilibrium, incomplete-markets model that focuses on the importance of idiosyncratic entrepreneurial risk -- a risk that introduces, not only a precautionary motive for saving, but also a wedge between the interest rate and the marginal product of capital. This friction provides a simple resolution to the empirical puzzle that capital often fails to flow from the rich or slow-growing countries to the poor or fast-growing ones, and a distinct set of policy lessons regarding the intertemporal costs and benefits of capital-account liberalization. Illus. A print on demand report.
Download or read book Idiosyncratic Risk Matters to Large Stocks written by Yangqiulu Luo and published by . This book was released on 2016 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: Despite the debate on the pricing of idiosyncratic risk, it is generally believed that the pricing effect is likely to exist among small stocks due to lack of diversification and information asymmetry predicted by Merton (1987). However, given the size of Asset Under Management, most institutional investors focus on large stocks and hold portfolios different from that of the market portfolio in order to attract investors and to differentiate themselves. Moreover, large stocks will have a larger impact on the performance of a portfolio than small stocks, and institutional investors are more likely to be questioned when large stocks perform poorly. These unique features can forced institutional investors to care about idiosyncratic risk of larger stocks more than that of small stocks in their portfolio. Recognizing this important difference on the impact of idiosyncratic risk, we take an unorthodox approach by focusing on the effect of idiosyncratic risk within different groups of stocks. As a result, we find that large stocks' idiosyncratic volatilities indeed are positively related to their future stock returns, while small stocks idiosyncratic volatilities are negatively related to their future returns as documented. This finding also allows us to reconcile the inconsistent findings on the pricing of idiosyncratic risk in the current literature.
Download or read book Idiosyncratic Investment Risk and Business Cycles written by Jonathan E. Goldberg and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Moving Beyond Modern Portfolio Theory written by Jon Lukomnik and published by Routledge. This book was released on 2021-04-29 with total page 175 pages. Available in PDF, EPUB and Kindle. Book excerpt: Moving Beyond Modern Portfolio Theory: Investing That Matters tells the story of how Modern Portfolio Theory (MPT) revolutionized the investing world and the real economy, but is now showing its age. MPT has no mechanism to understand its impacts on the environmental, social and financial systems, nor any tools for investors to mitigate the havoc that systemic risks can wreck on their portfolios. It’s time for MPT to evolve. The authors propose a new imperative to improve finance’s ability to fulfil its twin main purposes: providing adequate returns to individuals and directing capital to where it is needed in the economy. They show how some of the largest investors in the world focus not on picking stocks, but on mitigating systemic risks, such as climate change and a lack of gender diversity, so as to improve the risk/return of the market as a whole, despite current theory saying that should be impossible. "Moving beyond MPT" recognizes the complex relations between investing and the systems on which capital markets rely, "Investing that matters" embraces MPT’s focus on diversification and risk adjusted return, but understands them in the context of the real economy and the total return needs of investors. Whether an investor, an MBA student, a Finance Professor or a sustainability professional, Moving Beyond Modern Portfolio Theory: Investing That Matters is thought-provoking and relevant. Its bold critique shows how the real world already is moving beyond investing orthodoxy.
Download or read book Explorations Into Idiosyncratic Risk written by Nadejda Vozlioublennaia and published by . This book was released on 2007 with total page 228 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Idiosyncratic Volatility and the Pricing of Poorly Diversified Portfolios written by Joëlle Miffre and published by . This book was released on 2015 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: This article examines the role of idiosyncratic volatility in explaining the cross-sectional variation of size- and value-sorted portfolio returns. We show that the premium for bearing idiosyncratic volatility varies inversely with the number of stocks included in the portfolios. This conclusion is robust within various multifactor models based on size, value, past performance, liquidity and total volatility and also holds within an ICAPM specification of the risk-return relationship. Our findings thus indicate that investors demand an additional return for bearing the idiosyncratic volatility of poorly-diversified portfolios.
Download or read book A Time varying Premium for Idiosyncratic Risk written by Daruo Xie and published by . This book was released on 2015 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: Merton (1987) predicts that idiosyncratic risk can be priced. I develop a simple equilibrium model of capital markets with information costs in which the idiosyncratic risk premium depends on the average level of idiosyncratic volatility. This dependence suggests that the idiosyncratic risk premium varies over time. I find that in U.S. markets, the covariance between stock-level idiosyncratic volatility and the idiosyncratic risk premium explains future stock returns. Stocks in the highest quintile of the covariance between the volatility and risk premium earn an average 3-factor alpha of 70 bps per month higher than those in the lowest quintile.
Download or read book Does Investor Recognition Predict Returns written by Andriy Bodnaruk and published by . This book was released on 2008 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: Merton (1987) shows that stocks that not all investors are informed about should yield a return premium. This premium depends on the shadow cost of incomplete information which in turn is composed of the shareholder base, relative market size and idiosyncratic risk. Utilizing a comprehensive database of investor shareholdings, we demonstrate that stock returns are positively related to the shadow cost. Also in line with Merton, we find that the shareholder base is negatively related to returns when controlling for size and idiosyncratic risk. Zero-cost portfolios based on the shadow cost / shareholder base yield substantial trading profits which are either uncorrelated or have negative correlation with the market and are only modestly explained by the four factor model.
Download or read book Cointegration Causality and Forecasting written by Halbert White and published by Oxford University Press, USA. This book was released on 1999 with total page 512 pages. Available in PDF, EPUB and Kindle. Book excerpt: A collection of essays in honour of Clive Granger. The chapters are by some of the world's leading econometricians, all of whom have collaborated with and/or studied with both) Clive Granger. Central themes of Granger's work are reflected in the book with attention to tests for unit roots and cointegration, tests of misspecification, forecasting models and forecast evaluation, non-linear and non-parametric econometric techniques, and overall, a careful blend of practical empirical work and strong theory. The book shows the scope of Granger's research and the range of the profession that has been influenced by his work.
Download or read book Return Reversals Idiosyncratic Risk and Expected Returns written by Wei Huang and published by . This book was released on 2009 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: The empirical evidence on the cross-sectional relation between idiosyncratic risk and expected stock returns is mixed. We demonstrate that the omission of the previous month's stock returns can lead to a negatively biased estimate of the relation. The magnitude of the omitted variable bias depends on the approach to estimating the conditional idiosyncratic volatility. Although a negative relation exists when the estimate is based on daily returns, it disappears after return reversals are controlled for. Return reversals can explain both the negative relation between value-weighted portfolio returns and idiosyncratic volatility and the insignificant relation between equal-weighted portfolio returns and idiosyncratic volatility. In contrast, there is a significantly positive relation between the conditional idiosyncratic volatility estimated from monthly data and expected returns. This relation remains robust after controlling for return reversals.
Download or read book Idiosyncratic Risk written by Mr. Anthony J. Richards and published by International Monetary Fund. This book was released on 1999-11-01 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper models the idiosyncratic or asset-specific return of an asset as the return on a portfolio that is long in that asset and short in other assets in the same class, thereby removing the common components of returns. This is the type of “hedged” position that is held by relative-value investors. Weekly returns data for seven different asset classes suggest that idiosyncratic risk is: higher at times of large return outcomes for the asset class as a whole; positively autocorrelated; and correlated across different asset classes. The implications for risk management are discussed.
Download or read book Idiosyncratic Volatility and Stock Returns written by Kuntara Pukthuanthong and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Empirical evidences regarding the association of idiosyncratic volatility and stock returns are inconsistent with the capital asset pricing model (CAPM) which implies that idiosyncratic risk should not be priced because it would be fully eliminated through diversification. Using estimated-EGARCH conditional idiosyncratic volatility of individual stocks across 36 countries from 1973 to 2007, we find that idiosyncratic risk is priced on a significantly positive risk premium for stock returns. The evidence is statistically and economically significant. It overwhelmingly supports the prediction of existing theories that idiosyncratic risk is positively related to expected returns.
