Is idiosyncratic risk ignored in asset pricing: Sri Lankan evidence?

Moinak Maiti

Future Business Journal, 2019, vol. 5, issue 1, 1-12

Abstract: Abstract The present study focused on one of the important South Asian nations—Sri Lanka—to examine the role of idiosyncratic volatility in asset prices. A four-factor model with idiosyncratic volatility was designed for capturing the market, size, value and idiosyncratic risk yields better than Fama and French’s (J Financ Econ 33:3–56, 1993) three-factor model and performance of the model. Fama–MacBeth’s cross-sectional regression, residual graphs and GRS test all confirm the superiority of four-factor model over 2 three-factor models. For all MC- and IVOL-based portfolios, idiosyncratic volatility is negatively related to the expected returns and positively related for all PB-based portfolios. Finally, study findings confirm that there is a high importance for idiosyncratic volatility risk factor while considering investment decision in Colombo stock exchange. Hence, investor should compensate for holding such risk factors in the portfolio.

Keywords: Asset pricing; Idiosyncratic risk; Factor models; Fama–MacBeth’ cross-sectional regression; Risk (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (3)

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DOI: 10.1186/s43093-019-0004-6

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