Idiosyncratic Risk: An Empirical Analysis, with Implications for the Risk of Relative-Value Trading Strategies
November 1, 1999
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Summary
This paper models the idiosyncratic or asset-specific return of an asset as the return on a portfolio that is long in that asset and short in other assets in the same class, thereby removing the common components of returns. This is the type of “hedged” position that is held by relative-value investors. Weekly returns data for seven different asset classes suggest that idiosyncratic risk is: higher at times of large return outcomes for the asset class as a whole; positively autocorrelated; and correlated across different asset classes. The implications for risk management are discussed.
Subject: Emerging and frontier financial markets, Financial institutions, Financial markets, Financial regulation and supervision, Market risk, Securities markets, Stock markets, Stocks
Keywords: asset class, asset return, component of return, Dispersion, East Asia, Emerging and frontier financial markets, fixed income, Hedge Funds, Idiosyncratic Risk, Market risk, return outcome, return properties, returns share, returns-generating process, Risk Management, Securities markets, Stock markets, Stocks, WP
Pages:
33
Volume:
1999
DOI:
Issue:
148
Series:
Working Paper No. 1999/148
Stock No:
WPIEA1481999
ISBN:
9781451856804
ISSN:
1018-5941
