Expected Returns and Idiosyncratic Risk: Industry-level Evidence from Russia

We explore a relation between expected returns and idiosyncratic risk in Russia. Investors in the Russian stock market cannot fully diversify their portfolios due to transaction costs, information gathering and processing costs, and shortcomings in investor protection. This implies that investors demand a premium for idiosyncratic risk. We estimate the price of idiosyncratic risk using MIDAS regressions and a cross-section of Russian industry portfolios. We find that idiosyncratic risk is economically significant and commands a negative (positive) premium, on average, of 10.0 (8.0) percent per year before (after) the global financial crisis in 2008. The results remain unaffected after controlling for global pricing factors and return reversal.