Economics, Econometrics and Finance
4 years ago

Stock markets misprice idiosyncratic risk, leading to potential measurement problems.

Financial Management
The Dynamic Relation Between Returns and Idiosyncratic Volatility
Xiaoquan Jiang, Bong‐Soo Lee

Paper Summary

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The study shows that idiosyncratic risk, which is unique to individual stocks, has a significant positive impact on returns. By considering the persistence of this risk over time, the researchers found that stock markets tend to undervalue it. This suggests that there might be some issues in how idiosyncratic risk is measured, possibly related to nondiversifiable risk.