This paper considers a two period general equilibrium production model with incom-plete markets (GEI). The novelty of this model is the endogenous smooth asset structure introduced in Stiefenhofer (2010). It is shown that incomplete markets is a consequence of idiosyncratic risk. JEL: D20,D52

as total risk, including idiosyncratic risk, rather than only systematic risk. Further, we find that the variance of the market by itself has no forecasting power for the market return. These relations persist after we control for macroeconomic variables known to forecast the stock market. We show

We show that idiosyncratic risk is still priced after controlling for momentum and liquidity risk and then ask the following research question: If there is compensation for idiosyncratic risk, how economically large is the effect? Using different weighting schemes, we estimate the potential sizes

This paper uses a disaggregated approach to study the volatility of common stocks at the market, industry, and firm levels. Over the period 1962–1997 there has been a noticeable increase in firm-level volatility relative to market volatility. Accordingly, correlations among individual stocks and the explanatory power of the market model for a typical stock have declined, whereas the number of stocks needed to achieve a given level of diversification has increased. All the volatility measures move together countercyclically and help to predict GDP growth. Market volatility tends to lead the other volatility series. Factors that may be responsible for these findings are suggested.

This paper confirms the relationship between idiosyncratic risk and excess stock returns for Canadian equities. The relationship between returns and idiosyncratic risk is examined using Fama-MacBeth twostep methodology with a modified Carhart four-factor (five-beta) model. The Fama-MacBeth tests

for exogenous reasons, the remaining investors will also be unable to hold the market portfolio. Therefore, idiosyncratic risk could also be priced to compensate rational investors for an inability to hold the market portfolio. A variation of the CAPM model is derived to capture this observation as well

of idiosyncratic risk on investment is partly due to managerial risk aversion, and find that the negative relationship between idiosyncratic uncertainty and investment is stronger for firms with high levels of insider ownership. Several mechanisms can mitigate this effect namely the use of option

A b s t r a c t I examine the properties and portfolio management implications of value-weighted idiosyncratic volatility in 24 emerging markets. This paper provides evidence against the view that the rise of idiosyncratic risk is a global phenomenon. Specific and market risks jointly predict

We test the impact of idiosyncratic risk on stock returns for emerging markets. We expect that idiosyncratic risk should be positively associated with returns prior to financial market liberalization, but that liberalization should diminish this effect. Moreover, prior to liberalization, we expect

2009 Investor diversification and the pricing of idiosyncratic risk Theories predict that, due to investor under-diversification, idiosyncratic risk is positively priced in expected stock returns. Empirical studies based on various methodologies yield mixed evidence. This study circumvents