Investigating and analysing of idiosyncratic risk in ISE

Idiosyncratic risk as a component of unsystematic risk is omitted by CAPM which is commonly used in pricing of financial assets. However, contrary to CAPM, there are some asset pricing models which include idiosyncratic risk in asset pricing. On this basis, many studies in literature also confirm the importance of this risk component in terms of their results.The purpose of this study is to investigate the importance of idiosyncratic risk revealing the periodic movements of idiosyncratic risk in ISE, which is already determined in literature. For this purpose, daily returms of all stocks traded on ISE National Market during the period of January 1999 to December 2008 are included into the scope of analysis, to constitute monthly sample variance. ?Disaggregated Volatility Approach?, developed by Campbell and others (2001), is followed to estimate the firm volatility. This approach allows the decomposition of stock volatility to market, sector and firm-level volatility components, without any necessity of the estimation of covariances or betas for sectors or firms. The graphics of monthly time series and moving averages with this decomposition show that firm volatility is on average much higher than market and sector volatilities and this result implies that firm volatility is the most important component of the total volatility of an firm. In addition to this result, at the last stage of this study which has various detailed analyses, it is observed that when the stocks are grouped according to firm age, price and size at last stage, old, low-priced and large firms have higher firm volatility than young, high-priced and small firms and the firms which have high initial public offering ratio have on average much lower than those which have low initial public offering ratio.