Department of Finace, Fcaulty of Management and Accounting Shahid Beheshti University, Tehran
The present study aims at investigating the relationship between firm specific risk and stock return using cross-sectional quantile regression. In order to study the power of firm specific risk in explaining cross-sectional return, a combination of Fama-Macbeth (1973) model and quantile regression is used. To this aim, a sample of 270 firms listed in Tehran Stock Exchange during 1999-2010 was investigated. The results revealed that the relationship between firm specific risk and stock return is significantly affected by the quantile so that the direction of changes in low quantiles is negative, and in high quantiles, is positive. Moreover, using the specific risk measure based on return’s standard deviation, the interactive effects of industry and the fourth moment lead to removal of this relationship. One can attribute this relation to the mutual effect of industry and kurtosis. However, using measures based factor models, industry and kurtosis cannot eliminate the explanatory power of specific risk.