Idiosyncratic risk does not matter: A re-examination of the relationship between average returns and average volatilities

Xiangdong Wei, Chu Zhang

Research output: Journal article publicationJournal articleAcademic researchpeer-review

51 Citations (Scopus)


A recent study by Goyal and Santa-Clara [J. Finance 58 (2003) 975] finds a significantly positive relationship between average stock returns and pre-determined average return volatility measures, while finding no relationship between the average return and its own volatility. The result is interpreted as evidence that idiosyncratic risk matters in asset pricing. We re-examine the issue in extended sample periods and find the proclaimed positive relationship is not substantiated. Our analysis indicates that the above-mentioned positive relationship is mainly driven by the data in the 1990s. The trading strategy suggested by Goyal and Santa-Clara to exploit the return predictability by pre-determined volatility does not yield sustained economic gains.
Original languageEnglish
Pages (from-to)603-621
Number of pages19
JournalJournal of Banking and Finance
Issue number3
Publication statusPublished - 1 Jan 2005


  • Economic significance
  • Idiosyncratic risk
  • Stock return predictability

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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