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/lp/oxford-university-press/idiosyncratic-risk-innovations-and-the-idiosyncratic-risk-return-gHOmszqB32
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- Publisher
- Oxford University Press
- Copyright
- © The Author 2016. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oup.com
- ISSN
- 2045-9920
- eISSN
- 2045-9939
- DOI
- 10.1093/rapstu/raw002
- Publisher site
- See Article on Publisher Site
Abstract
AbstractStocks with increases in idiosyncratic risk tend to earn low subsequent returnsfor a few months. However, high idiosyncratic risk stocks eventually earnpersistently high returns. These results are consistent with positively pricedidiosyncratic risk and temporary underreaction to idiosyncratic riskinnovations. Because risk levels and innovations are correlated, the relationbetween historical idiosyncratic risk and returns may reflect both risk premiumsand underreaction and yield misleading inference regarding the price of risk.The results reconcile previous work offering conflicting evidence on the priceof idiosyncratic risk and help to discriminate among explanations for theidiosyncratic risk-return relation.Received November 24, 2014; accepted December 20, 2015 by Editor JeffreyPontiff.
Journal
The Review of Asset Pricing Studies – Oxford University Press
Published: Dec 1, 2016