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Idiosyncratic risk and cross-section of stock returns in emerging European markets

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  • Czapkiewicz, Anna
  • Wójtowicz, Tomasz
  • Zaremba, Adam

Abstract

The nature and sources of the low-risk anomaly have been mainly studied in developed markets. Do they hold in emerging ones? Using data from 1999 to 2019, we examine the idiosyncratic risk puzzle in European emerging markets. We confirm that the idiosyncratic volatility negatively predicts returns in the cross-section. Nonetheless - unlike in developed markets - the pattern comes mainly from underpriced stocks. Moreover, it is augmented by high turnover and liquidity. Finally, the illiquidity-enhanced three-factor model fully explains the idiosyncratic risk anomaly. Our findings indicate that conclusions from developed markets do not directly apply to emerging markets.

Suggested Citation

  • Czapkiewicz, Anna & Wójtowicz, Tomasz & Zaremba, Adam, 2023. "Idiosyncratic risk and cross-section of stock returns in emerging European markets," Economic Modelling, Elsevier, vol. 124(C).
    • Handle: RePEc:eee:ecmode:v:124:y:2023:i:c:s0264999323001347
    DOI: 10.1016/j.econmod.2023.106322
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    More about this item

    Keywords

    Idiosyncratic risk; Idiosyncratic momentum; Asset pricing model; Illiquidity;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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