Does Idiosyncratic Risk Matter: Another Look
This paper shows that the equal-weighted average stock volatility analyzed and forecasts stock returns because of its co-movements with stock market volatility. Moreover, contrary to the positive relation hypothesized and it was found that the value-weighted average stock volatility is negatively related to future stock returns when combined with stock market volatility. This puzzling result reflects the fact that the value weighted average stock volatility is negatively correlated with the consumption-wealth ratio, and its predictive power vanishes if the control for the latter in the forecasting equation. The idiosyncratic volatility provides no information beyond the forecasting variables advocated keywords: Idiosyncratic Stock Volatility, Stock Market Volatility, Consumption-Wealth Ratio, and Stock Return Predictability.