DOES IDIOSYNCRATIC RISK MATTER IN CURRENT MARKET CONDITIONS?

Abstract

In this Master Thesis, we study the impact of idiosyncratic volatility on stock excess returns, focusing on 1980-2003 and 2003-2021 time horizons for the US and Norwegian markets. We do this by calculating IVOL as the residuals from FF-3 and regressing it on stock excess returns using Fama-MacBeth procedure. In addition, we analyze the impact of skewness in comparison to IVOL. Our findings state that in 1980-2003 time horizon IVOL has a negative risk premium for the US, but in 2003-2021 period IVOL has a positive risk premium. In Noway IVOL does not have any risk premium.