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The Idiosyncratic Volatility in Euro Zone Firms: Evolution, Cross-Sectional Relation with Returns

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  • Ahmed K.F. SOLIMAN
  • Erwan LE SAOUT

Abstract

This paper discusses the behaviour of the time series and the pricing of the idiosyncratic risk in 10 Eurozone economies from January 2000 to June 2018. We identify as well factors upon which depend the idiosyncratic risk premium. Our results show evidence of a common component within these countries’ aggregate idiosyncratic volatilities. Using Fama and MacBeth cross-sectional regressions, we observe a positive relationship between the idiosyncratic volatility and expected stock returns denying the idiosyncratic risk puzzle found by Ang et al. (2006). By performing Pooled OLS and radomn effects models, the results indicate that under-diversification proxies have a significant impact on the idiosyncratic risk premium.

Suggested Citation

  • Ahmed K.F. SOLIMAN & Erwan LE SAOUT, 2023. "The Idiosyncratic Volatility in Euro Zone Firms: Evolution, Cross-Sectional Relation with Returns," Applied Economics and Finance, Redfame publishing, vol. 10(1), pages 6884-6884, February.
    • Handle: RePEc:rfa:aefjnl:v:10:y:2023:i:1:p:6884
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    References listed on IDEAS

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    1. Merton, Robert C, 1987. "A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July.
    2. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    3. Robert F. Stambaugh & Jianfeng Yu & Yu Yuan, 2015. "Arbitrage Asymmetry and the Idiosyncratic Volatility Puzzle," Journal of Finance, American Finance Association, vol. 70(5), pages 1903-1948, October.
    4. Wei, Steven X. & Zhang, Chu, 2005. "Idiosyncratic risk does not matter: A re-examination of the relationship between average returns and average volatilities," Journal of Banking & Finance, Elsevier, vol. 29(3), pages 603-621, March.
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    Cited by:

    1. Soliman, Alain & Le Saout, Erwan, 2024. "The impact of the war in Ukraine on the idiosyncratic risk and the market risk," Finance Research Letters, Elsevier, vol. 60(C).

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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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