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| Author: | Goyal, A. Santa-Clara, P. |
| Title: | Idiosyncratic risk matters! |
| Journal: | Journal of Finance
2003 : JUN, VOL. 58:3, p. 975-1007 |
| Index terms: | Stock markets Financial risk Return on investment Rate of return |
| Language: | eng |
| Abstract: | The authors take a new look at the predictability of stock market returns with risk measures, They find a significant positive relation between average stock variance and the return on the market. In contrast, the variance of the market has no forecasting power for the market return. These relations persist after the authord control for macroeconomic variables known to forecast the stock market. The evidence is consistent with models of timevarying risk premia based on background risk and investor heterogeneity. Alternatively, the findings can be justified by the option value of equity in the capital structure of the firms. |
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