Idiosyncratic Risk : An Empirical Analysis, with Implications for the Risk of Relative-Value Trading Strategies

Author/Editor:

Anthony J. Richards

Publication Date:

November 1, 1999

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Series:

Working Paper No. 99/148

Subject:

English

Publication Date:

November 1, 1999

ISBN/ISSN:

9781451856804/1018-5941

Stock No:

WPIEA1481999

Format:

Paper

Pages:

33

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