Idiosyncratic risk matter chinbat

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here is the late ppt of my modern investment the description here is small unrecognizable risk discoveries of idiosyncratic risk
P.S another risk model

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Idiosyncratic risk matter chinbat

  1. 1. Th e j rnal of finance Vol LVIII,N o.3 JU N E 2003 ou Idiosyncratic risk matter AM IT G O YAL and P E D R O S AN TA-C LAR ANational Dong Hwa university Presenter D.Chinbat Prof. Wen shei li FIN0840
  2. 2. C ontent Abstract Motivation Introduction Main results Risk measure Descriptive statistics Predictive Regressions Robustness check Empirical result Conclusion
  3. 3. Abstract Th is p ap e r d oe s find a s ignificant p os itive re lation b e twe e n ave rage s tock variance (large ly id ios yncratic) and th e re tu rn on th e m arke t. In contras t, variance of th e m arke t h as no fore cas ting p owe r for th e m arke t re tu rn. Th e s e re lations p e rs is t afte r we control for m acroe conom ic variab le s known to fore cas t th e s tock m arke t M os t as s e t p ricing m od e ls s tarting with M e rton’s 1 973. C AP M s u gge s t p os itive re lation b e twe e n ris k and re tu rn for aggre gate s tock m arke t Th e re lations h ip b e twe e n a ris k and re tu rn h as b e e n fou nd ins ignificant, and s om e tim e s e ve n ne gative .
  4. 4.  Innovation in th is p ap e r is look at ave rage s tock ris k in ad d ition to m arke t ris k. It m e as u re s ave rage s tock ris k in e ach m onth . U s ing a cros s -s e ctional ave rage of th e variance of all th e s tocks trad e d th at m onth . R u n p re d ictive re gre s s ions of m arke t re tu rn on th is variance m e as u re as we ll as th e variance of m arke t Th at m arke t variance h as no fore cas ting p owe r for th e m arke t re tu rn
  5. 5. Lite ratu re s tu d ying In ve ry e arly work D ou glas 1 969 and Lintne r 1 965 find th at th e variance of th e re s id u als from a m arke t m od e l is s trongly s ignificant in e xp laining th e cros s -s e ction of ave rage s tock re tu rns , b u t M ille r and S ch ole s 1 972 and F am a and M acb e th 1 973 p oint ou t s om e s tatis tical p itfall in analys is G re e n and R yd qvis t 1 997 p re s e nt an inte re s ting s tu d y of th e p ricing of S we d is h lotte ry b ond s and find th at th e s e b ond s com m and a p re m iu m for ris k th at is id ios yncratic b y cons tru ction. O u r p ap e r is ab ou t th e tim e -s e rie s re lation b e twe e n ave rage s tock ris k and th e s tock m arke t re tu rn. It is not C ros s -s e ction p ricing of s tocks , alth ou gh th e two as p e cts are , of cou rs e , re late d .
  6. 6.  M os t im p ortant p art of th is p ap e r work is th e re are two p rom ine nt e xam p le s of non-trad e d as s e ts th at h ave b e e n wid e ly s tu d ie d in lite ratu re : 1 H u m an cap ital and 2 P rivate b u s ine s s e s . F or b oth of th e s e non-trad e d as s e ts it s e e m s re as onab le th at th e ir ris kine s s s h ou ld b e re late d to th e total ris k of ave rage trad e d s tock. re s u lts we h ave als o cons is te nt with th e m od e l of cons tantinid e s and D u ffie 1 996 th e ir m od e l, inve s tor are s u b j ct to id ios yncratic incom e e s h ocks , and e q u ilib riu m ris k p re m iu m d e p e nd on th e cros s -s e ction variance of cons u m p tion growth am ong inve s tors .
  7. 7. Motivation To d o th is p ap e r inve s tigate is ab ou t id ios yncratic ou r analys is p roce e d s as follows in ne xt s e ctions th e y are m e as u re s of m arke t ris k and ave rage s tock ris k and p re s e nt th e m ain find ing ab ou t th e p re d ictive ab ility of ave rage s tock ris k for s tock m arke t In th is s e ction introd u ce ou r ris k m e as u re s and inve s tigate th e ir re lation to th e m arke t re tu rn. Th e n th e variance of th e m arke t h as no fore cas ting p owe r for th e m arke t re tu rn. O nly find s ignificant p os itive re lation b e twe e n ave rage s tock variance and th e re tu rn on th e m arke t
  8. 8. IntroductionIntrod u ce th is ris k m e as u re and inve s tigate th e ir re lation to th e m arke t re tu rnth at th e variance of th e m arke t h as no fore cas ting p owe r for th e m arke tre tu rn. In contras t we find a s ignificant p os itive re lation b e twe e n ave rages tock variance and th e re tu rn on th e m arke t
  9. 9. Main result R is k m e as u re E ach m onth , com p u te th e m onth ly variance of p ortfolio p u s ing with in m onth ly d aily re tu rn d ata asD t is th e nu m b e r of d ays in m onth t and rp d is th e p ortfolios re tu rn on d ayd th e s e cond te rm on th e righ t-h and s id e ad j s t for th e au tocorre lation in ud aily re tu rns u s ing th e ap p roach p rop os e d b y F re nch 1 975
  10. 10.  C om p u te th e ave rage s tock variance as th e arith m e tic ave rage of th e m onth ly variance of e ach s tocks re tu rns

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