Can asset pricing models price idiosyncratic risk in U.K. stock returns?

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

I examine how well different linear factor models and consumption-based asset pricing models price idiosyncratic risk in U.K. stock returns. Correctly pricing idiosyncratic risk is a significant challenge for many of the models I consider. For some consumption-based models, there is a clear tradeoff in the performance of the models between correctly pricing systematic risk and idiosyncratic risk. Linear factor models do a better job in most cases in pricing systematic risk than consumption-based models but the reverse is true for idiosyncratic risk.
LanguageEnglish
Pages507-535
Number of pages28
JournalFinancial Review
Volume42
Issue number4
DOIs
Publication statusPublished - 2007

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Stock returns
Asset pricing models
Idiosyncratic risk
Pricing
Asset prices
Trade-offs

Keywords

  • idiosyncratic risk
  • stochastic discount factor

Cite this

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title = "Can asset pricing models price idiosyncratic risk in U.K. stock returns?",
abstract = "I examine how well different linear factor models and consumption-based asset pricing models price idiosyncratic risk in U.K. stock returns. Correctly pricing idiosyncratic risk is a significant challenge for many of the models I consider. For some consumption-based models, there is a clear tradeoff in the performance of the models between correctly pricing systematic risk and idiosyncratic risk. Linear factor models do a better job in most cases in pricing systematic risk than consumption-based models but the reverse is true for idiosyncratic risk.",
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Can asset pricing models price idiosyncratic risk in U.K. stock returns? / Fletcher, Jonathan.

In: Financial Review, Vol. 42, No. 4, 2007, p. 507-535.

Research output: Contribution to journalArticle

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