The conditional pricing of systematic and idiosyncratic risk in the UK equity market

John Cotter, Niall O' Sullivan and Francesco Rossi ()

International Review of Financial Analysis, 2015, vol. 37, issue C, 184-193

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, 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 volatility 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 some role for liquidity, size and momentum risk but not value risk in explaining the cross-section of returns.

Keywords: Asset pricing; Idiosyncratic risk; Turnover; Conditional beta (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (7)

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Working Paper: The Conditional Pricing of Systematic and Idiosyncratic Risk in the UK Equity Market (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:37:y:2015:i:c:p:184-193

DOI: 10.1016/j.irfa.2014.10.002

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