Merton (1987) predicts that idiosyncratic risk can be priced. I develop a simple equilibrium model of capital markets with information costs in which the idiosyncratic risk premium depends on the average level of idiosyncratic volatility. This dependence suggests that the idiosyncratic risk premium varies over time. I find that in U.S. markets, the covariance between stock-level idiosyncratic volatility and the idiosyncratic risk premium explains future stock returns.
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- Partial requirement for: Ph.D., Arizona State University, 2015Note typethesis
- Includes bibliographical references (p. 47-48)Note typebibliography
- Field of study: Business administration