New Risk Measure and Idiosyncratic Risk in Taiwan Stock Market

Under the model developed by Merton (1987), the idiosyncratic risk would be important to explain the expected stock return. We follow the approach of Daniel and Titman (1998), and use the risk measure developed by Jan and Wang (2012) to examine whether idiosyncratic risk can play an important role in explaining the expected return in Taiwan stock market. We find that beta can’t explain the expected return, and that idiosyncratic risk has a positive relation to expected returns for stocks with smaller beta portfolio. We also explore a weak evidence of the positive relationship between idiosyncratic risk and expected return for size-sorted portfolio.