The Empirical Research Of The Relation Between The Idiosyncratic Risk And Expected Stock Return On China's Growth Enterprise Market

The classical capital asset pricing model assumes that the capital market is effective,investors can diversify idiosyncratic risk by constructing a sufficiently diversified portfolio,so only systematic risk needs to be priced and idiosyncratic risk does not need to be priced.However,the assumptions provided by the capital asset pricing model are not consistent with the reality,due to the constraint of capital costs,the level of knowledge and information asymmetry,actually investors cannot hold fully diversified portfolios,so investors require certain excess returns to compensate for the idiosyncratic risk they assume,that is to say,it is a problem about whether there is a positive correlation between idiosyncratic risk and expected stock return.However,in recent years,some scholars have found that the relationship between idiosyncratic risk and expected return is negative,and no financial theory can explain this phenomenon,so the academic community regards the financial anomaly as “the idiosyncratic volatility puzzle”.This paper adopt China Growth Enterprise Market stock market data for study,employing Fama-French three-factor model and EGARCH model to measure idiosyncratic volatility at the same time.And this paper employs the three methods of portfolio analysis,two-dimension group analysis and Fama-MacBeth two-stage regression to study the relationship between idiosyncratic volatility and expected return.We find that no matter we apply one-month lagged or expected idiosyncratic volatility to measure idiosyncratic volatility,there is a significantly negative relationship between idiosyncratic volatility and expected return,and this negative correlation cannot be explained by firm size,book market ratio,momentum,ownership concentration and maximum historical rate of return.At last,we find that turnover rate and circulation ratio can explain “the idiosyncratic volatility puzzle” to a certain extent.Based on the conclusion of this paper,this paper suggests that investors should rationally deal with the relationship between risk and return,not blindly pursue high risk,and make a balance between risk and return.Meanwhile,regulators should gradually relax the restrictions on short selling,reduce the threshold of margin trading and transaction costs,abandon the lock-up period,and strengthen the supervision of the market to enhance public confidence in the capital market.