Idiosyncratic risk and expected returns in frontier markets: Evidence from GCC

Jorg Bley and Mohsen Saad

Journal of International Financial Markets, Institutions and Money, 2012, vol. 22, issue 3, 538-554

Abstract: We investigate the pricing of idiosyncratic volatility of seven frontier markets in six GCC countries. We find a significant (marginal) negative relationship between expected returns and lagged idiosyncratic volatility for individual stocks in Saudi Arabia (Qatar) but none in Kuwait and Abu Dhabi. However, when we estimate conditional idiosyncratic volatility either by EGARCH or AR Models, the relationship turns positive. Introducing unexpected idiosyncratic volatility as an explanatory variable to control for any unexpected returns uncovers the true relationship between expected idiosyncratic volatility and expected returns. The evidence turns out to be robust for return reversals and other control variables. Moreover, the pricing of idiosyncratic risk is less evident in higher country governance and seems to be unrelated to the degree of financial development.

Keywords: Idiosyncratic risk; Expected stock returns; GCC markets (search for similar items in EconPapers)
JEL-codes: F3 G12 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:22:y:2012:i:3:p:538-554

DOI: 10.1016/j.intfin.2012.01.004

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