Idiosyncratic volatility and the pricing of poorly-diversified portfolios

Miffre, Joëlle; Brooks, Chris; Li, Xiafei

Abstract

This article examines the role of idiosyncratic volatility in explaining the cross-sectional variation of size- and value-sorted portfolio returns. We show that the premium for bearing idiosyncratic volatility varies inversely with the number of stocks included in the portfolios. This conclusion is robust within various multifactor models based on size, value, past performance, liquidity and total volatility and also holds within an ICAPM specification of the risk–return relationship. Our findings thus indicate that investors demand an additional return for bearing the idiosyncratic volatility of poorly-diversified portfolios.

Citation

Miffre, J., Brooks, C., & Li, X. (2013). Idiosyncratic volatility and the pricing of poorly-diversified portfolios. International Review of Financial Analysis, 30, 78-85. https://doi.org/10.1016/j.irfa.2013.05.007

• Journal Article Type: Article
• Acceptance Date: May 28, 2013
• Online Publication Date: Jun 6, 2013
• Publication Date: 2013-12
• Deposit Date: Jun 1, 2023
• Journal: International Review of Financial Analysis
• Print ISSN: 1057-5219
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 30
• Pages: 78-85
• DOI: https://doi.org/10.1016/j.irfa.2013.05.007
• Keywords: Economics and Econometrics; Finance
• Additional Information: This article is maintained by: Elsevier; Article Title: Idiosyncratic volatility and the pricing of poorly-diversified portfolios; Journal Title: International Review of Financial Analysis; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.irfa.2013.05.007; Content Type: article; Copyright: Copyright © 2013 Elsevier Inc. All rights reserved.