Idiosyncratic risk and cross-section of stock returns in emerging European markets

Anna Czapkiewicz, Tomasz Wójtowicz and Adam Zaremba

Economic Modelling, 2023, vol. 124, issue C

Abstract: The nature and sources of the low-risk anomaly have been mainly studied in developed markets. Do they hold in emerging ones? Using data from 1999 to 2019, we examine the idiosyncratic risk puzzle in European emerging markets. We confirm that the idiosyncratic volatility negatively predicts returns in the cross-section. Nonetheless - unlike in developed markets - the pattern comes mainly from underpriced stocks. Moreover, it is augmented by high turnover and liquidity. Finally, the illiquidity-enhanced three-factor model fully explains the idiosyncratic risk anomaly. Our findings indicate that conclusions from developed markets do not directly apply to emerging markets.

Keywords: Idiosyncratic risk; Idiosyncratic momentum; Asset pricing model; Illiquidity (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 G15 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:124:y:2023:i:c:s0264999323001347

DOI: 10.1016/j.econmod.2023.106322

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