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

November 1, 1999

Preview Citation

Format: Chicago

Anthony J. Richards Idiosyncratic Risk: An Empirical Analysis, with Implications for the Risk of Relative-Value Trading Strategies, (USA: International Monetary Fund, 1999) accessed November 24, 2024

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.

Subject: Emerging and frontier financial markets, Financial institutions, Financial markets, Financial regulation and supervision, Market risk, Securities markets, Stock markets, Stocks

Keywords: Asset class, Asset return, Component of return, Dispersion, East Asia, Emerging and frontier financial markets, Fixed income, Hedge Funds, Idiosyncratic Risk, Market risk, Return outcome, Return properties, Returns share, Returns-generating process, Risk Management, Securities markets, Stock markets, Stocks, WP

Publication Details

Pages:

33
Volume:

---
DOI:

---
Issue:

---
Series:

Working Paper No. 1999/148
Stock No:

WPIEA1481999
ISBN:

9781451856804
ISSN:

1018-5941

FACTSHEETS

RESOURCES

TOPICS

Flagship Publications

Other Publications

IMF reports and publications by country

Regional Offices

All News

See Also

For Journalists

Press Center

RESOURCES

FLAGSHIPS

KEY SERIES

IMF NOTES

IMF Working Papers