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Expected Returns and Idiosyncratic Risk: Industry-Level Evidence from Russia
Authors:Jyri Kinnunen  Minna Martikainen
Institution:Hanken School of Economics, Helsinki, Finland
Abstract:We explore a relation between expected returns and idiosyncratic risk in Russia. Investors in the Russian stock market cannot fully diversify their portfolios due to transaction costs, information gathering and processing costs, and shortcomings in investor protection. This implies that investors demand a premium for idiosyncratic risk. We estimate the price of idiosyncratic risk using MIDAS regressions and a cross section of Russian industry portfolios. We find that idiosyncratic risk is economically significant and commands a negative (positive) premium, on average, of 10.0% (8.0) per year before (after) the global financial crisis in 2008. The results remain unaffected after controlling for global pricing factors and return reversal.
Keywords:cross-sectional returns  idiosyncratic risk  industry risk  MIDAS  Russia
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