Idiosyncratic Risk Matters: Evidence from India

For a sample of US firms, Goyal and Santa-Clara (2003) find

that the average stock variance is positively associated with

higher returns in the subsequent month. The authors interpret

the evidence as supporting the hypothesis that idiosyncratic

risk matters. Several subsequent papers employing different

methodologies present evidence conflicting with the findings of

Goyal and Santa-Clara. We adopt the approach of Goyal and

Santa-Clara in the Indian context. The results we obtain when

we measure volatility on a monthly basis do not offer support

for evidence documented in Goyal and Santa-Clara. However,

when we compute volatility over weekly intervals, we find

results consistent with those presented by Goyal and Santa-
Clara. Our results in the Indian context are in line with the

generally supportive evidence obtained using international data

about the positive relationship between conditional volatilities

and expected returns with an important difference. Supporting

the arguments of Andersen, Bollerslev, Diebold, and Labys

(2003), our results suggest that higher frequency data is more

powerful in predicting future volatilities.

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