Expected Returns and Idiosyncratic Risk: Industry-Level Evidence from Russia

32 Pages Posted: 27 Nov 2015

See all articles by Jyri Kinnunen

Jyri Kinnunen

Swedish School of Economics and Business Administration

Minna Martikainen

University of Vaasa; Hanken School of Economics

Date Written: 2015

Abstract

​In this paper, we explore a relation between expected returns and idiosyncratic risk. As in many emerging markets, investors in the Russian stock market cannot fully diversify their portfolios due to transaction costs, information gathering and processing costs, and short-comings in investor protection. This implies that investors demand a premium for idiosyncratic risk – unique asset-specific risk plays a role in investment decisions. We estimate the price of idiosyncratic risk using MIDAS regressions and a cross-section of Russian industry portfolios. We find that idiosyncratic risk commands an economically and statistically significant risk premium. The results remain unaffected after controlling for global pricing factors and short-term return reversal.

Keywords: G12, idiosyncratic risk, industry risk, cross-sectional returns, MIDAS, Russia

Suggested Citation

Kinnunen, Jyri and Martikainen, Minna, Expected Returns and Idiosyncratic Risk: Industry-Level Evidence from Russia (2015). BOFIT Discussion Paper No. 30/2015, Available at SSRN: https://ssrn.com/abstract=2694994

Jyri Kinnunen (Contact Author)

Swedish School of Economics and Business Administration ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland

Minna Martikainen

University of Vaasa ( email )

P.O. Box 700
Wolffintie 34
FIN-65101 Vaasa, FI-65101
Finland
+358504681823 (Phone)

Hanken School of Economics ( email )

PoBox 479
Helsinki, 00100
Finland

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