Systematic Risk, Idiosyncratic Risk, and Asset Pricing Models: Empirical Evidence from the Vietnamese Stock Market

Abstract

Motivated by Huang et al.’s (2013) recent arguments, we empirically examine the risk-return tradeoff in a liberalized emerging stock market, Vietnam during 2007 to 2014. We find that: i) neither realized idiosyncratic volatility nor conditional idiosyncratic volatility has been priced; ii) both the Fama-French three-factor model and the Carhart (1997) four-factor model could well explain the stock portfolio returns; iii)there are flat trends for both equal-weighted IVOL and E-IVOL, but a downward for market volatility over the study time. Our results contribute that the idiosyncratic risk plays an unimportant role in pricing stocks, and that the systematic risks still nominate asset returns in liberalized emerging stock markets. Our findings also imply that Vietnamese investors cannot arbitrage from IVOL trading strategy, but can increase benefit from the portfolio diversification.