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Idiosyncratic Risk; An Empirical Analysis, with Implications for the Risk of Relative-Value Trading Strategies

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  • Anthony J. Richards

Abstract

This paper models the idiosyncratic or asset-specific return of an asset as the return on a portfolio that is long in that asset and short in other assets in the same class, thereby removing the common components of returns. This is the type of “hedged” position that is held by relative-value investors. Weekly returns data for seven different asset classes suggest that idiosyncratic risk is: higher at times of large return outcomes for the asset class as a whole; positively autocorrelated; and correlated across different asset classes. The implications for risk management are discussed.

Suggested Citation

  • Anthony J. Richards, 1999. "Idiosyncratic Risk; An Empirical Analysis, with Implications for the Risk of Relative-Value Trading Strategies," IMF Working Papers 99/148, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:99/148
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    References listed on IDEAS

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    1. Jeffery D Amato & Jacob Gyntelberg, 2005. "CDS index tranches and the pricing of credit risk correlations," BIS Quarterly Review, Bank for International Settlements, March.
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    Cited by:

    1. Goodfellow, Christiane & Bohl, Martin T. & Gebka, Bartosz, 2009. "Together we invest? Individual and institutional investors' trading behaviour in Poland," International Review of Financial Analysis, Elsevier, vol. 18(4), pages 212-221, September.
    2. Hwang, Soosung & Salmon, Mark, 2004. "Market stress and herding," Journal of Empirical Finance, Elsevier, pages 585-616.
    3. Domanski, Dietrich, 2003. "Idiosyncratic Risk in the 1990s: Is It an IT Story?," WIDER Working Paper Series 007, World Institute for Development Economic Research (UNU-WIDER).
    4. Michael E. Drew & Mirela Mallin & Tony Naughton & Madhu Veeraraghavan, 2004. "Equity Premium: - Does it exist? Evidence from Germany and United Kingdom," School of Economics and Finance Discussion Papers and Working Papers Series 170, School of Economics and Finance, Queensland University of Technology.
    5. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany.
    6. Yao, Juan & Ma, Chuanchan & He, William Peng, 2014. "Investor herding behaviour of Chinese stock market," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 12-29.
    7. David Hirshleifer & Siew Hong Teoh, 2003. "Herd Behaviour and Cascading in Capital Markets: a Review and Synthesis," European Financial Management, European Financial Management Association, vol. 9(1), pages 25-66.

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