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Can Asset Pricing Models Price Idiosyncratic Risk in U.K. Stock Returns?

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  • Jonathan Fletcher
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    Abstract

    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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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6288.2007.00181.x
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    Bibliographic Info

    Article provided by Eastern Finance Association in its journal Financial Review.

    Volume (Year): 42 (2007)
    Issue (Month): 4 (November)
    Pages: 507-535

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    Handle: RePEc:bla:finrev:v:42:y:2007:i:4:p:507-535

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    Web page: http://www.easternfinance.org/
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