Idiosyncratic Volatility Matter? New Zealand Evidence

Standard asset pricing models ignore idiosyncratic risk. In this study we examine if stock idiosyncratic or unique risk affects returns for New Zealand stocks using the factor portfolio mimicking approach of Fama and French (1993, 1996). We find evidence of a negative relationship between firm size and a stock’s idiosyncratic volatility. Small firms and firms with high idiosyncratic risk also generate positive risk premia after controlling for market returns. We find no evidence of seasonal effects that can explain our findings. Our study provides support for an asset-pricing model with multiple risk factors.