A New Measure for Idiosyncratic Risk Based on Decomposition Method

Meng-Horng Lee, Chee-Wooi Hooy and Robert Brooks
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Meng-Horng Lee: RHB Investment Bank Bhd, Level 3A, Tower One, RHB Centre, Jalan Tun Razak, Kuala Lumpur 50400, Malaysia

JRFM, 2023, vol. 16, issue 1, 1-8

Abstract: This paper introduces an alternate measure of idiosyncratic risk leveraged from the decomposition method to further eliminate the residual systematic risk inherent in the factor asset pricing model. Combining both complementary techniques contributes to a more comprehensive firm-level idiosyncratic risk that is crucial in both portfolio diversification and alpha investing. We focus our result on the idiosyncratic risk estimations and their behaviour on 36 emerging markets covering 39 industries. We show that the new measure exhibits a declining trend across time, consistent with the fact that emerging markets are becoming more integrated with the increased level of common effect across time.

Keywords: systematic risk; idiosyncratic risk; total risk; decomposition; emerging markets (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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