I examine how well different linear factor models and consumption-based asset pricing models price idiosyncratic risk in U.K. stock returns. Correctly pricing idiosyncratic risk is a significant challenge for many of the models I consider. For some consumption-based models, there is a clear tradeoff in the performance of the models between correctly pricing systematic risk and idiosyncratic risk. Linear factor models do a better job in most cases in pricing systematic risk than consumption-based models but the reverse is true for idiosyncratic risk. Copyright 2007, The Eastern Finance Association.
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Article provided by Eastern Finance Association in its journal Financial Review.
Volume (Year): 42 (2007) Issue (Month): 4 (November) Pages: 507-535 Download reference. The following formats are available: HTML
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