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  5. The Conditional Pricing of Systematic and Idiosyncratic Risk in the UK Equity Market
 
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The Conditional Pricing of Systematic and Idiosyncratic Risk in the UK Equity Market

Author(s)
Cotter, John  
O'Sullivan, Niall  
Rossi, Francesco  
Uri
http://hdl.handle.net/10197/5661
Date Issued
2014-03
Date Available
2014-06-19T14:57:54Z
Abstract
We test whether firm idiosyncratic risk is priced in a large cross-section of U.K. stocks. A distinguishing feature of our paper is that our tests allow for a conditional relationship between systematic risk (beta) and returns in our tests, i.e., conditional on whether the
excess market return is positive or negative. We find strong evidence in support of a conditional beta/return relationship which in turn reveals conditionality in the pricing of idiosyncratic risk. We find that idiosyncratic risk is significantly negatively priced in stock returns in down-markets. Although perhaps initially counter-intuitive, we describe the theoretical support for such a finding in the literature. Our results also reveal a strong role for liquidity, size and momentum factors in explaining the cross-section of U.K. stock returns.
Sponsorship
Science Foundation Ireland
Type of Material
Working Paper
Publisher
University College Dublin. Geary Institute
Series
UCD Geary Institute Discussion Paper Series
WP2014/03
Subjects

Asset pricing

Idiosyncratic risk

Turnover

Conditional beta

Web versions
http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201403.pdf
Language
English
Status of Item
Not peer reviewed
This item is made available under a Creative Commons License
https://creativecommons.org/licenses/by-nc-nd/3.0/ie/
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gearywp201403.pdf

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Checksum (MD5)

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Owning collection
Geary Institute Working Papers

Item descriptive metadata is released under a CC-0 (public domain) license: https://creativecommons.org/public-domain/cc0/.
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