The Conditional Pricing of Systematic and Idiosyncratic Risk in the UK Equity Market
|Title:||The Conditional Pricing of Systematic and Idiosyncratic Risk in the UK Equity Market||Authors:||Cotter, John
|Permanent link:||http://hdl.handle.net/10197/5661||Date:||Mar-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.||Funding Details:||Science Foundation Ireland||Type of material:||Working Paper||Publisher:||University College Dublin. Geary Institute||Series/Report no.:||UCD Geary Institute Discussion Paper Series; WP2014/03||Keywords:||Asset pricing; Idiosyncratic risk; Turnover; Conditional beta||Other versions:||http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201403.pdf||Language:||en||Status of Item:||Not peer reviewed|
|Appears in Collections:||Geary Institute Working Papers|
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