Idiosyncratic Risk Pricing: Evidence based Information Content of Earnings

Abstract

Some empirical researches document the relation between idiosyncratic volatility and stock return and they have challenged classic finance literature on the issue that idiosyncratic risk is not priced. This research examines idiosyncratic risk pricing in Tehran Stock Exchange in addition to investigation of its information content about future earnings. For the purpose, it uses portfolio analysis approach and Fama-MacBeth regression. The results show that there is positive risk premium for bearing IVOL. Test of IVOL information content indicates that there is inverse relation between IVOL and future earnings so it can be claimed that IVOL strongly is affected by earnings accrual component. In this way, IVOL information content about future earnings is confirmed but this finding does not suffice to explain the reasons of idiosyncratic risk pricing. At the same time, latter relation is not affected by investors' under-reaction and excess extrapolation on firms' growth.

Keywords

• Asset Pricing
• Idiosyncratic Risk
• information content of Earning