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Does Idiosyncratic Volatility Matter? New Zealand Evidence

  • Michael E. Drew

    (School of Economics and Finance, Queensland University of Technology, GPO Box 2434, Brisbane, Queensland 4001, Australia)

  • Alastair Marsden

    (Department of Accounting and Finance, The University of Auckland Business School, Private Bag 92019, Auckland, New Zealand)

  • Madhu Veeraraghavan

    ()

    (Department of Accounting and Finance, Monash University, Clayton Campus, Victoria 3800, Melbourne, Australia)

Standard asset pricing models ignore idiosyncratic risk. In this study, we examine if idiosyncratic or unique risk affects returns for New Zealand stocks using the factor portfolio mimicking approach of Fama and French (1993, 1996). We find evidence of a negative relationship between firm size and a stock's idiosyncratic volatility. We also find that high idiosyncratic volatility firms have high betas and generate low earnings on book equity.

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Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Review of Pacific Basin Financial Markets and Policies.

Volume (Year): 10 (2007)
Issue (Month): 03 ()
Pages: 289-308

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Handle: RePEc:wsi:rpbfmp:v:10:y:2007:i:03:p:289-308
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