Investigating the Effect of Unsystematic Risk on Stock Returns: The Empirical Research on Borsa İstanbul

Abstract

Unsystematic risk has a great effect on the investors' decisions. Therefore, the unsystematic risk, which address all firm related risk including managerial risks influence investor demand for a stock and, consequently, its price. In emerging markets such as Borsa Istanbul, company based risk becomes even more significant due to structure of the market. Therefore, identifying the effect of unsystematic risk on returns provides valuable guidance to investors investing in Borsa Istanbul. This study examines the impact of unsystematic risk on stock returns using two methods and four different econometric models. The econometric models were estimated in the analysis, incorporating control variables such as book value-to-market value, beta, and firm size, in addition to unsystematic risk. The empirical results show that a higher level of firm-specific risk has a statistically significant and positive effect on stock returns. The book-to-market ratio and firm size also positively affect returns, while the effect of beta is inconsistent across models. The use of two different non-systematic risk measures and four dependent variables serves as a robustness check and demonstrates that the effect of non-systematic risk on returns is not merely a temporary phenomenon specific to the model structure.

Keywords

• Unsystematic risk
• stock returns
• panel regression models

Sistematik Olmayan Riskin Pay Senedi Getirileri Üzerindeki Etkisinin Araştırılması: Borsa İstanbul Üzerine Ampirik Bir Araştırma

Abstract

Sistematik olmayan risk yatırımcıların yatırım kararı üzerinde doğrudan bir etkiye sahiptir. Firmadan kaynaklı ve yönetimsel riskler yatırımcının pay senedine olan talebini ve dolayısıyla pay senedinin fiyatını belirlemektedir. Özellikle Borsa İstanbul gibi gelişmekte olan piyasalarda firma riski daha önemli hale gelmektedir. Dolaysıyla sistematik olmayan riskin getiri üzerindeki etkisinin ortaya konulması yatırımcılara rehber bilgiler sağlayacaktır. Bu amaçla, bu çalışmada iki farklı yöntem ile elde edilen sistematik olmayan riskin pay getirileri üzerindeki etkisi incelenmiştir. Dört farklı ekonometrik modelin tahmin edildiği analizde sistematik olmayan riske ek olarak defter değeri - piyasa değeri, beta ve firma büyüklüğü gibi bazı kontrol değişkenleri kullanılmıştır. Elde edilen ampirik sonuçlar, daha yüksek firma temelli risk seviyesinin pay getirileri üzerinde istatistiksel olarak anlamlı ve pozitif bir etkiye sahip olduğunu göstermektedir. Defter değeri-piyasa değeri ve firma büyüklüğü getirileri pozitif yönde etkilerken, betanın etkisi modeller arasında tutarsızdır. Analiz sürecinde kullanılan iki farklı sistematik olmayan risk ölçütü ile iki farklı bağımlı değişkenin dahil edilmesi, bir sağlamlık analizi işlevi görmekte ve sistematik olmayan riskin getiriler üzerindeki etkisinin sadece model yapısına özgü geçici bir durum olmadığını göstermektedir.

Keywords

• Sistematik Olmayan Risk
• Pay Getirisi
• Panel Regresyon Modeli

References

1. Akarsu, S. (2023). Idiosyncratic volatility, network centrality, and stock returns. Borsa Istanbul Review, 23(5), 1191-1206.
2. Astakhov, A., Havranek, T., and Novak, J. (2017). Firm size and stock returns: A meta-analysis (IES Working Paper No. 14/2017). Institute of Economic Studies, Charles University.
3. Atak, A. (2024). Beyond polarity: How ESG sentiment influences idiosyncratic volatility in the Turkish stock market. Borsa Istanbul Review, 24, 10-21.
4. Baker, M., Wurgler J. (2006). Investor sentiment and the cross‐section of stock returns. The Journal of Finance 61(4): 1645-1680.
5. Bali, T. G., Cakici N. (2008). Idiosyncratic volatility and the cross section of expected returns. Journal of Financial and Quantitative Analysis 43(1): 29-58.
6. Balvers, R. (2001). Foundations of Asset Pricing. West Virgina: Virgina University Review.
7. Bozhkov, S., Lee H., Sivarajah U., Despoudi S., and Nandy M. (2020). Idiosyncratic risk and the cross-section of stock returns: the role of mean-reverting idiosyncratic volatility. Annals of Operations Research 294(1): 419-452.
8. Büberkökü, Ö. (2021). Risk-getiri ilişkisinin analizi: Türkiye örneği. Finans Ekonomi ve Sosyal Araştırmalar Dergisi 6(1): 14-38.

9. Büker, S., Aşıkoğlu, R. and Sevil, G. (1997). Finansal Yönetim. 2. Baskı, Eskişehir: Anadolu Üniversitesi Yayınları.
10. Çam, S. (2024). Does idiosyncratic risk have a significant impact on return probability? a case study of Borsa Istanbul 100 stocks. Çankırı Karatekin Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, 14(2), 451-466.
11. Cam, S., Uzkaralar, Ö., and Borak, M. (2024). Idiosyncratic risk and market volatility: Threat or opportunity for returns? A study of Borsa Istanbul stocks. Borsa Istanbul Review, 24(4), 698-709.
12. Chua, C. T., Goh J., and Zhang Z. (2008). Expected Volatility, Unexpected Volatility, and the Cross-Section of Stock Returns. Working Paper, Singapore Management University
13. Chung, K. H., Wang J., and Wu C. (2019). Volatility and the cross-section of corporate bond returns. Journal of Financial Economics 133(2): 397-417.
14. Clark, T. S., and Linzer, D. A. (2015). Should I use fixed or random effects?. Political science research and methods, 3(2), 399-408
15. De Santis and Imrohoğlu S. (1997). Stock returns and volatility in emerging financial markets. Journal of International Money and finance 16(4): 561-579.
16. Fabozzi, F. J., Focardi S. M., Kolm P.N., and Pachamanova D. A. (2007). Robust portfolio optimization and management. John Wiley & Sons.
17. Ferreira, M. A., and Laux, P. A. (2007). Corporate governance, idiosyncratic risk, and information flow. The journal of finance, 62(2), 951-989.
18. Fu, F. (2009). Idiosyncratic risk and the cross-section of expected stock returns. Journal of Financial Economics 91(1): 24-37.
19. Hotvedt, J. E., and Tedder, P. L. (1978). Systematic and unsystematic risk of rates of return associated with selected forest products companies. Journal of Agricultural and Applied Economics, 10(1), 135-138.
20. Huang, W., Liu Q., Rhee S. G., and Zhang L. (2010). Return reversals, idiosyncratic risk, and expected returns. The Review of Financial Studies 23(1): 147-168.
21. Huang, W., Liu, Q., Rhee, S. G., and Zhang, L. (2010). Return reversals, idiosyncratic risk, and expected returns. The Review of Financial Studies, 23(1), 147-168.
22. Hyung, N., De Vries C.G. (2005). Portfolio diversification effects of downside risk. Journal of Financial Econometrics 3(1): 107-125.
23. Koluku, R. F., Pangemanan S.S., and Tumewu F. (2015). Analysis of market risk, financial leverage, and firm size toward stock return on non-banking companies listed in LQ45 index of IDX. Jurnal Riset Ekonomi, Manajemen, Bisnis dan Akuntansi 3(2): 528-536.
24. Kumari, J., Mahakud, J., and Hiremath, G. S. (2017). Determinants of idiosyncratic volatility: Evidence from the Indian stock market. Research in International Business and Finance, 41, 172-184.
25. León, A., Nave J. M., Rubio G. (2007). The relationship between risk and expected return in Europe. Journal of Banking & Finance, 31(2): 495-512.
26. Levy, H. (1978). Equilibrium in an Imperfect Market: A Constraint on the Number of Securities in the Portfolio. The American Economic Review 68(4): 643-658.
27. Malgharni, A.M. and Karimnia, M. (2014). Investigate the Relationship Between Unsystematic Risk and Profit Growth of Accepted Companies in Tehran Stock Exchange. Singaporean Journal of Business Economics and Management Studies, 2(11), 147-154.
28. Malkiel, B. G., and Xu, Y. (2002). Idiosyncratic risk and security returns. University of Texas at Dallas (November 2002), 15.
29. Merton, R. C. (1987). Presidential Address: A Simple Model of Capital Market Equilibrium with Incomplete Information. Journal of Finance 42:483–510.
30. Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross‐section dependence. Journal of applied econometrics, 22(2), 265-312.
31. Qadan, M., Kliger D., and Chen N. (2019). Idiosyncratic volatility, the VIX and stock returns. The North American Journal of Economics and Finance 47: 431-441.
32. Rajalakshmi ve Gohil, P.R. (2008). Risk-Return Relationship and the effect of Diversification on Unsystematic Risk using Market Index Model. Institute of Business Management and Research. Ahmedabad: India
33. Risal, N., ve Campus, L. N. C. (2013). A Study on Risk-Return Relationship: The Effect of Diversification on Unsystematic Risk. PRAVAHA Journal of Management, 21(1).
34. Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal Of Finance, 19(3), 425-442.
35. Umutlu, M. (2015). Idiosyncratic volatility and expected returns at the global level. Financial Analysts Journal, 71(6): 58-71.
36. Umutlu, M. (2019). Does idiosyncratic volatility matter at the global level?. The North American Journal of Economics and Finance 47: 252-268.