Is Idiosyncratic Risk Priced? The International Evidence

• DOI: 10.2139/ssrn.1364530
• Publication Date: 2011-12-28T18:09:45Z
• Authors: Paul Brockman; Maria G. Schutte; Wayne Yu
• Keywords: Systematic risk

We find a positive and significant relation between forecasted idiosyncratic volatility andreturns in large international database covering 57 countries with over three million firmmonthobservations from July 1995 to June 2016. Our empirical results reveal substantialcross-country variation the magnitude of risk premiums. Consistentwith classic asset pricing theory (e.g., Markowitz, 1959; Merton, 1987), we thatidiosyncratic premiums are positively associated investor impediments toportfolio diversification. Specifically, larger countrieswith less developed financial markets, higher transaction costs, market shares ofneglected stocks.