Serguey Khovansky; Zhylyevskyy, Oleksandr

Proceedings of the 2011 Midwest Finance Association Annual Meeting, Midwest Finance Association, March 2011

We investigate empirical properties of idiosyncratic volatility using cross-sections of stock returns in the standard framework of geometric Brownian motion price dynamics. Knowledge of the sign and magnitude of idiosyncratic volatility characteristics may help us better understand the role of idiosyncratic risk in asset pricing. This knowledge may also help practitioners devise innovative investment strategies to exploit profitable investment opportunities that have not been eliminated because of transaction costs, investment indivisibilities, incomplete information, or the presence of other non-diversifiable factors and market rigidities.

JEL Classification: C21, C51, G10

Keywords: Common shock, Systematic risk, Cross-sectional returns, Idiosyncratic volatility, Generalized method of moments

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