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Idiosyncratic risk matters! A regime switching approach

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  • Angelidis, Timotheos
  • Tessaromatis, Nikolaos

Abstract

The evidence on the inter-temporal relation between idiosyncratic risk and future stock returns is conflicting and confusing. We shed new light on the issue using a more flexible econometric approach based on [Hamilton, J.D. 1989. A new approach to the economic analysis of nonstationary time series and the business cycle. Econometrica, 57, 357-384.] regime switching model that accommodates the parameter instability of the forecasting relation between returns and financial variables. We find strong evidence suggesting that idiosyncratic risk is related to future stock market returns only in the low variance regime.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Economics & Finance.

Volume (Year): 18 (2009)
Issue (Month): 1 (January)
Pages: 132-141

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Handle: RePEc:eee:reveco:v:18:y:2009:i:1:p:132-141

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Web page: http://www.elsevier.com/locate/inca/620165

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Keywords: Idiosyncratic risk Stock market volatility Regime switching;

References

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  1. Scott Mayfield, E., 2004. "Estimating the market risk premium," Journal of Financial Economics, Elsevier, Elsevier, vol. 73(3), pages 465-496, September.
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Citations

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Cited by:
  1. Abugri, Benjamin A. & Dutta, Sandip, 2014. "Are we overestimating REIT idiosyncratic risk? Analysis of pricing effects and persistence," International Review of Economics & Finance, Elsevier, Elsevier, vol. 29(C), pages 249-259.
  2. Mu-Shun Wang, 2013. "Idiosyncratic Volatility and the Expected Stock Returns for Exploring the Relationship with Panel Threshold Regression," Asia-Pacific Financial Markets, Springer, Springer, vol. 20(2), pages 113-129, May.
  3. Pilar Abad Romero & María Dolores Robles Fernández, 2012. "Credit rating agencies and unsystematic risk: Is there a linkage?," Documentos de Trabajo del ICAE 2012-17, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  4. Yuan, Chunming, 2011. "Forecasting exchange rates: The multi-state Markov-switching model with smoothing," International Review of Economics & Finance, Elsevier, Elsevier, vol. 20(2), pages 342-362, April.
  5. Stavros Degiannakis & Andreas Andrikopoulos & Timotheos Angelidis & Christos Floros, 2013. "Return dispersion, stock market liquidity and aggregate economic activity," Working Papers 166, Bank of Greece.
  6. Miralles-Marcelo, José Luis & Miralles-Quirós, María del Mar & Miralles-Quirós, José Luis, 2012. "Asset pricing with idiosyncratic risk: The Spanish case," International Review of Economics & Finance, Elsevier, Elsevier, vol. 21(1), pages 261-271.

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