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School of Management
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Patricia Schoch, UTD
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pschoch@utdallas.edu  

   

UTD’s Dr. Yexiao Xu Wins Smith Breeden Prize
For Paper on ‘Idiosyncratic Risk’ In Stock Market

 

RICHARDSON, Texas (Feb. 15, 2002) - Yexiao Xu, assistant professor of finance in the School of Management at The University of Texas at Dallas (UTD), has been awarded The American Finance Association’s Smith Breeden best paper prize for “Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk,” written with John Campbell, Martin Lettau and Burton G. Malkiel.

The Smith Breeden prizes are awarded annually for the top three papers published in The Journal of Finance. The prizewinner for the best paper is awarded $10,000 and the two prizes for distinguished papers earn $5,000 each.

Bloomberg Financial, Business Week, Economic Institution, Financial Times, Fortune, Money, The New York Times and The Wall Street Journal have each cited the paper, which was published as the lead article in the February 2001 issue of The Journal of Finance.

“On behalf of UTD and the School of Management, we would like to congratulate Professor Xu on achieving this award. The amount of recognition for this paper has been outstanding,” said Dr. Hasan Pirkul, dean of the school.

The paper argues that despite the common feeling of increasing volatility in the stock market in the recent decade, the market-wide volatility has been fairly stable over the past 40 years. “Investors feel there are tremendous uncertainties about individual stocks because of the company specific risk, or idiosyncratic risk,” stated Professor Xu. “In fact, idiosyncratic volatility has doubled over the past 40 years. In the words of New York Times columnist Mark Hulbert, ‘The sea is calm, the ponds are choppy.’”

This idea has very important implications for investors. The standard finance theory recommends that investors should hold a diversified portfolio since they will only be rewarded for taking market risk.

“The rule of thumb in the old days was that holding a portfolio of 20 stocks is sufficient to diversify away idiosyncratic risk. This becomes more difficult to achieve since idiosyncratic risk has gone up so much in the recent decade. Our results suggest that individual investors should at least hold a portfolio of 50 stocks,” adds Xu.

Professor Xu graduated from Princeton University in 1996 with a Ph.D. degree in economics. Prior to attending Princeton University, he spent three years at Brigham Young University and received two master’s degrees in managerial economics and electrical and computer engineering, respectively. At UTD, Professor Xu teaches both graduate and undergraduate corporate finance as well as a seminar in asset pricing for Ph.D. students.

About UTD

The University of Texas at Dallas, located at the convergence of Richardson, Plano and Dallas in the heart of the complex of major multinational technology corporations known as the Telecom Corridor, enrolls more than 7,000 undergraduate and 5,000 graduate students. The school’s freshman class traditionally stands at the forefront of Texas state universities in terms of average SAT scores. The university offers a broad assortment of bachelor’s, master’s and doctoral degree programs. For additional information about UTD, please visit the university’s web site at www.utdallas.edu


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August 15, 2002