Idiosyncratic Risk Innovations and the Idiosyncratic Risk-ReturnRelation

Mark Rachwalski and Quan Wen

The Review of Asset Pricing Studies, 2016, vol. 6, issue 2, 303-328

Abstract: Stocks with increases in idiosyncratic risk tend to earn low subsequent returnsfor a few months. However, high idiosyncratic risk stocks eventually earnpersistently high returns. These results are consistent with positively pricedidiosyncratic risk and temporary underreaction to idiosyncratic riskinnovations. Because risk levels and innovations are correlated, the relationbetween historical idiosyncratic risk and returns may reflect both risk premiumsand underreaction and yield misleading inference regarding the price of risk.The results reconcile previous work offering conflicting evidence on the priceof idiosyncratic risk and help to discriminate among explanations for theidiosyncratic risk-return relation.

JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://hdl.handle.net/10.1093/rapstu/raw002 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:rasset:v:6:y:2016:i:2:p:303-328.

Access Statistics for this article

The Review of Asset Pricing Studies is currently edited by Zhiguo He

More articles in The Review of Asset Pricing Studies from Society for Financial Studies
Bibliographic data for series maintained by Oxford University Press ().