Risk components in UK cross-sectional equities: evidence of regimes and overstated parametric estimates

Francesco Rossi ()

MPRA Paper from University Library of Munich, Germany

Abstract: We study the behavior and interaction of systematic and idiosyncratic components of risk in a cross-section of U.K. stocks. We find no clear evidence of a trend in any component of total risk, but we document different “regimes” in the behavior of each component of total risk, in their correlation patterns and thus in their contribution to aggregate risk. Comparing parametric and non-parametric estimates of residual risk, we find the former to significantly overstate diversifiable risk, opposite to some previous findings for the U.S. market, with the difference being very large especially when we include an industry component.

Keywords: Idiosyncratic risk; residual risk; systematic risk; non parametric estimates; cross-sectional equities; cross-sectional risk; equities; U.K.; industry risk; correlation; regimes; factor models (search for similar items in EconPapers)
JEL-codes: C13 C14 C21 C22 G1 G10 G11 G12 G15 (search for similar items in EconPapers)
Date: 2011-11-30, Revised 2012-03-31
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:38682

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