Higher Moments and Idiosyncratic Volatility Puzzle

Verification of direct relation between unsystematic risk and return (by Drew et als (2006) and Fu (2009)) on the one hand and  affirmation of reverse relation between idiosyncratic volatility and return by some academicians such as Ang etals (2006,2009) on the other hand, resulted in forming idiosyncratic risk puzzle. This research objective is to investigate the role of third and fourth moments as potential explanations for the idiosyncratic risk puzzle. So, a sample composed of 270 listed firms in Tehran Stock Exchange during 1378 to 1389 is investigated using portfolio approach and Fama-MacBeth (1973) model. Total used observations for these methods are more than 9000 firm-season.
The results confirm positive relation between skewness and return but do not show significant relation between kurtosis and stock return. The effect of skewness and kurtosis on the relation between idiosyncratic risk and return strongly is affected by considerations such as IVOL measure, mechanical rules for thin trading and weighting scheme of portfolio return. Nonetheless, because the lack of explicite theory about third and fourth moments pricing, it cannot impute the origin of return and unsystematic risk relation to skewness and kurtosis.