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Do firm characteristics matter for the dynamics of idiosyncratic risk?

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  • Vozlyublennaia, Nadia

Abstract

We investigate the effects of several firm characteristics utilized in the recent literature to account for puzzling dynamics of idiosyncratic risk. Our results suggest that these characteristics (book-to-market, leverage, size, institutional ownership, earnings-per-share, and turnover) are able to explain well the differences in idiosyncratic risk across securities. On the other hand, the characteristics appear to be poor predictors of the fluctuations in idiosyncratic risk of a given security over time. About 80% of the securities in our sample do not have a significant relationship between any of the considered characteristics and idiosyncratic risk at security level. These results suggest that firm characteristics can be used in the analysis of the differences in risk across securities, such as portfolio composition. However, the characteristics do not appear useful in the analysis of security risk dynamics, for example, monitoring portfolio risk over time. These conclusions are robust to alternative specifications of idiosyncratic risk, security samples, and time periods.

Suggested Citation

  • Vozlyublennaia, Nadia, 2013. "Do firm characteristics matter for the dynamics of idiosyncratic risk?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 35-46.
    • Handle: RePEc:eee:intfin:v:27:y:2013:i:c:p:35-46
    DOI: 10.1016/j.intfin.2013.07.006
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    2. Kumari, Jyoti & Mahakud, Jitendra & Hiremath, Gourishankar S., 2017. "Determinants of idiosyncratic volatility: Evidence from the Indian stock market," Research in International Business and Finance, Elsevier, vol. 41(C), pages 172-184.
    3. Mohamed Masry & Heba El Menshawy, 2018. "The Impact of Unsystematic Risk on Stock Returns in an Emerging Capital Markets (ECM¡¯s) Country: An Empirical Study," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 9(1), pages 189-202, January.
    4. Lisa R. Goldberg & Saad Mouti, 2019. "Sustainable Investing and the Cross-Section of Returns and Maximum Drawdown," Papers 1905.05237, arXiv.org, revised Dec 2023.
    5. Su, Zhi & Shu, Tengjia & Yin, Libo, 2018. "The pricing effect of the common pattern in firm-level idiosyncratic volatility: Evidence from A-Share stocks of China," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 497(C), pages 218-235.
    6. Bin Liu & Monica Tan & Marie-Anne Cam, 2019. "Reinvestigate the Bid–Ask Bounce Effect and Pricing of Idiosyncratic Volatility: The Case of the Australian Market," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(01), pages 1-23, March.

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