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Does idiosyncratic risk matter: another look

Hui Guo () and Robert Savickas

No 2003-025, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We show that the equal-weighted average stock volatility analyzed by Goyal and Santa-Clara (GS, 2003) forecasts stock returns because of its co-movements with stock market volatility. Moreover, contrary to the positive relation hypothesized by GS and many others, we find that the value-weighted average stock volatility is negatively related to future stock returns when combined with stock market volatility. This puzzling result reflects the fact that the alue-weighted average stock volatility is negatively correlated with the consumption-wealth ratio, and its predictive power vanishes if we control for the latter in the forecasting equation. The idiosyncratic volatility proposed by GS thus provides no information beyond the forecasting variables advocated by Guo (2003)2:26 PM 10/17/03

Keywords: Stock market; Asset pricing (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-ets, nep-fin and nep-rmg
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