| Summary: | This paper examines the relationship between idiosyncratic risk and stock returns in BRICS (Brazil, Russia, India, China, and South Africa) countries by applying parametric and nonparametric approaches. It also explores the idiosyncratic risk puzzle by dividing firms into groups based on fundamentals, such as their market risk, financial constraints, and liquidity position. Finally, it investigates whether the idiosyncratic risk is priced in BRICS countries’ equity markets. The results provide strong evidence of the idiosyncratic risk puzzle in all BRICS countries, as the stock returns are significantly and negatively related to idiosyncratic risk during the period examined. Consistent with the arbitrage asymmetry, this negative relationship among high-beta, illiquid, and financially constrained firms is stronger and is more statistically significant than that of their counterpart firms. Finally, the results prove that the arbitrage score factor is a significant pricing factor in all the markets examined.
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