Does Idiosyncratic Risk Really Matter?

  • Author(s): TURAN G. BALI, NUSRET CAKICI, XUEMIN (STERLING) YAN, ZHE ZHANG
  • Published: Mar 02, 2005
  • Pages: 905-929
  • DOI: 10.1111/j.1540-6261.2005.00750.x

ABSTRACT

Goyal and Santa‐Clara (2003) find a significantly positive relation between the equal‐weighted average stock volatility and the value‐weighted portfolio returns on the NYSE/AMEX/Nasdaq stocks for the period of 1963:08 to 1999:12. We show that this result is driven by small stocks traded on the Nasdaq, and is in part due to a liquidity premium. In addition, their result does not hold for the extended sample of 1963:08 to 2001:12 and for the NYSE/AMEX and NYSE stocks. More importantly, we find no evidence of a significant link between the value‐weighted portfolio returns and the median and value‐weighted average stock volatility.

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