Why does idiosyncratic risk have a systematic component?

Sohnke Bartram, University of Warwick
Event information
Date 18th November 2015
Time 1:00pm - 2:00pm
Venue ICMA Centre, Room G03/04
Event types:
Research Seminars

From 1962 through 2011, idiosyncratic risk (IR) is high when market risk (MR) is high. We show that the positive relation between IR and MR is highly stable through time and is robust across exchanges, firm size, liquidity, and market-to-book groupings. Though stock liquidity affects the strength of the relation, the relation is strong for the most liquid stocks. Firm characteristics related to the ability of firms to adjust to higher uncertainty help explain the strength of the relation. Specifically, the relation is weaker for firms with more growth options. This evidence is consistent with the view that growth options provide a hedge against macroeconomic uncertainty.

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