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

John Cotter, Niall O'Sullivan and Francesco Rossi ()
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Niall O'Sullivan: School of Economics and Centre for Investment Research, University College Cork

No 201403, Working Papers from Geary Institute, University College Dublin

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.

Keywords: asset pricing; idiosyncratic risk; turnover; conditional beta. (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2014-02-19
New Economics Papers: this item is included in nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201403.pdf First version, 2014 (application/pdf)

Related works:
Journal Article: The conditional pricing of systematic and idiosyncratic risk in the UK equity market (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ucd:wpaper:201403

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