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IDIOSYNCRATIC RISK PREMIA AND MOMENTUM
Author(s) -
Chichernea Doina C.,
Slezak Steve L.
Publication year - 2013
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2013.12016.x
Subject(s) - volatility (finance) , systematic risk , economics , momentum (technical analysis) , stock (firearms) , econometrics , variation (astronomy) , financial economics , monetary economics , physics , engineering , mechanical engineering , astrophysics
Abstract Theory predicts that in the presence of incomplete information, underdiversified investors will demand idiosyncratic risk premia (IRP) as compensation for idiosyncratic volatility (IV). We estimate IV and IRP at the individual stock level and document the extent to which momentum profits can be explained by cross‐sectional variation in IRP. We show that a large portion of momentum profits can be explained by cross‐sectional variation in IRP and that, as predicted by theory, variations in both momentum profits and IRP are related to the ratio of firm size to investor base. However, significant momentum profits in low‐IV securities cannot be explained by cross‐sectional variation in IRP.