Idiosyncratic Risk

Download or read book Idiosyncratic Risk written by Mr.Anthony J. Richards and published by International Monetary Fund. This book was released on 1999-11-01 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper models the idiosyncratic or asset-specific return of an asset as the return on a portfolio that is long in that asset and short in other assets in the same class, thereby removing the common components of returns. This is the type of “hedged” position that is held by relative-value investors. Weekly returns data for seven different asset classes suggest that idiosyncratic risk is: higher at times of large return outcomes for the asset class as a whole; positively autocorrelated; and correlated across different asset classes. The implications for risk management are discussed.