A Time-varying Premium for Idiosyncratic Risk
| Author | : Daruo Xie |
| Publisher | : |
| Total Pages | : 59 |
| Release | : 2015 |
| ISBN-13 | : OCLC:911298372 |
| ISBN-10 | : |
| Rating | : 4/5 ( Downloads) |
Download or read book A Time-varying Premium for Idiosyncratic Risk written by Daruo Xie and published by . This book was released on 2015 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: Merton (1987) predicts that idiosyncratic risk can be priced. I develop a simple equilibrium model of capital markets with information costs in which the idiosyncratic risk premium depends on the average level of idiosyncratic volatility. This dependence suggests that the idiosyncratic risk premium varies over time. I find that in U.S. markets, the covariance between stock-level idiosyncratic volatility and the idiosyncratic risk premium explains future stock returns. Stocks in the highest quintile of the covariance between the volatility and risk premium earn an average 3-factor alpha of 70 bps per month higher than those in the lowest quintile.
