Is idiosyncratic risk conditionally priced? | Zendy

Mehra Rajnish | Zendy; Wahal Sunil | Zendy; Xie Daruo | Zendy

AI Assistant Blog Pricing

Home ZAIA Blog

Open Access

Is idiosyncratic risk conditionally priced?

Author(s) -

Mehra Rajnish,

Wahal Sunil,

Xie Daruo

Publication year - 2021

Publication title -

quantitative economics

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.062

H-Index - 27

eISSN - 1759-7331

pISSN - 1759-7323

DOI - 10.3982/qe1528

Subject(s) - diversification (marketing strategy) , systematic risk , volatility (finance) , economics , incomplete markets , risk premium , econometrics , capital asset pricing model , financial economics , monetary economics , business , microeconomics , marketing

In Merton (1987), idiosyncratic risk is priced in equilibrium as a consequence of incomplete diversification. We modify his model to allow the degree of diversification to vary with average idiosyncratic volatility. This simple recognition results in a state‐dependent idiosyncratic risk premium that is higher when average idiosyncratic volatility is low, and vice versa. The data appear to be consistent a positive state‐dependent premium for idiosyncratic risk both in the US and other developed markets.

The content you want is available to Zendy users.

Already have an account? Click here to sign in.

Having issues? You can contact us here

Accelerating Research