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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

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Author(s)
Cotter, John 
O'Sullivan, Niall 
Rossi, Francesco 
Uri
http://hdl.handle.net/10197/5661
Date Issued
March 2014
Date Available
19T14:57:54Z June 2014
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
Keywords
  • 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Not peer reviewed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/
Owning collection
Geary Institute Working Papers
Views
1585
Acquisition Date
Jan 26, 2023
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Downloads
300
Acquisition Date
Jan 26, 2023
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