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.
Original language | English |
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Pages (from-to) | 507-535 |
Number of pages | 28 |
Journal | Financial Review |
Volume | 42 |
Issue number | 4 |
DOIs | |
Publication status | Published - 2007 |
Keywords
- idiosyncratic risk
- stochastic discount factor