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Does Idiosyncratic Risk Matter in the Brazilian Capital Market?

Author

Listed:
  • Fernando Caio Galdi

    (Fucape Business School)

  • José Roberto Securato

    (Departamento de Administração, FEA/USP)

Abstract

This paper analyses the relationship between idiosyncratic risk and diversified portfolio returns on Brazil’s capital market. Following Goyal and Santa-Clara (2003) and Bali et alii (2005) we use volatility measures that capture systematic and idiosyncratic risk. For the identification of the relationship between idiosyncratic risk and portfolio returns we use a time series framework regressing volatility measures and portfolio returns one step ahead from 1999:01 to 2006:03. Additionally, we carry out robustness tests to validate our results. We found no evidence of a relationship between idiosyncratic risk and portfolio returns for the Brazilian capital market. Our evidence is similar to those from Bali et alii (2005) for the US capital market, which challenges the Goyal e Santa-Clara (2003) findings.

Suggested Citation

  • Fernando Caio Galdi & José Roberto Securato, 2007. "Does Idiosyncratic Risk Matter in the Brazilian Capital Market?," Brazilian Review of Finance, Brazilian Society of Finance, vol. 5(1), pages 41-58.
    • Handle: RePEc:brf:journl:v:5:y:2007:i:1:p:41-58
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    More about this item

    Keywords

    Idiosyncratic risk; stock market volatility; portfolio returns;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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