Idiosyncratic volatility as a new factor

Under the research hypothesis of testing whether there is a significant relation between expected stock return and idiosyncratic volatility in emerging markets, we gathered 5-year daily return data on MSCI Emerging Markets Index constituents and investigated the prediction power of four type of asset pricing models (e.g. CAPM, 3-factor Fama-French, 4-factor Carhart and modified 5-factor Carhart model with idiosyncratic volatility (IVHML). We discovered, that the IVHML coefficient is significant in all testing periods, and the overall model better describes expected returns (Adj. R^2 is higher among all others).