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

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  • Jonathan Fletcher

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.

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  • Jonathan Fletcher, 2007. "Can Asset Pricing Models Price Idiosyncratic Risk in U.K. Stock Returns?," The Financial Review, Eastern Finance Association, vol. 42(4), pages 507-535, November.
    • Handle: RePEc:bla:finrev:v:42:y:2007:i:4:p:507-535
    DOI: 10.1111/j.1540-6288.2007.00181.x
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    Cited by:

    1. J. Davies & Jonathan Fletcher & Andrew Marshall, 2015. "Testing index-based models in U.K. stock returns," Review of Quantitative Finance and Accounting, Springer, vol. 45(2), pages 337-362, August.
    2. Darren D. Lee & Jacquelyn E. Humphrey & Karen L. Benson & Jason Y. K. Ahn, 2010. "Socially responsible investment fund performance: the impact of screening intensity," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(2), pages 351-370, June.

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