Examining the Relationship Between Idiosyncratic Risk and Stock Returns: Insights from the Moroccan Stock Market

This paper investigates the trade-off between indiosyncratic risk and expected stock return in the Moroccan market using a novel approach. Departing from the notion that systematic risk alone may not fully explain stock return variation, we analyze the cross-sectional relationship between expected stock return, idiosyncratic volatility, and expected individual volatility on the Casablanca Stock Exchange (CSE). Employing EGARCH frameworks alongside the Fama-French Three-Factor model and Fama-Macbeth cross-section technique, we find a significant negative impact of idiosyncratic volatility on the Moroccan stock market, while the relation between stock performance and expected individual volatility is insignificant. This suggests unique market characteristics in Morocco, distinguishing it from more mature financial markets.