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Asset pricing with idiosyncratic risk: The Spanish case

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  • Miralles-Marcelo, José Luis
  • Miralles-Quirós, María del Mar
  • Miralles-Quirós, José Luis

Abstract

Idiosyncratic risk has been the subject of a great deal of international financial research. However, one question remains unsolved thus far: how to introduce it in asset pricing models. The aim of this paper is two-fold. Firstly, we propose and compare two alternative implications of idiosyncratic risk in asset pricing: (i) as a friction or (ii) as a source of another kind of systematic risk un-captured by beta coefficient. Secondly, we improve the international empirical evidence with an in-depth analysis of the Spanish stock market over the period 1987–2007. Our findings have important implications for portfolio and risk management.

Suggested Citation

  • Miralles-Marcelo, José Luis & Miralles-Quirós, María del Mar & Miralles-Quirós, José Luis, 2012. "Asset pricing with idiosyncratic risk: The Spanish case," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 261-271.
  • Handle: RePEc:eee:reveco:v:21:y:2012:i:1:p:261-271
    DOI: 10.1016/j.iref.2011.07.004
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    Cited by:

    1. Wang, Li-Hsun & Lin, Chu-Hsiung & Fung, Hung-Gay & Chen, Hsien-Ming, 2013. "An analysis of stock repurchase in Taiwan," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 497-513.
    2. repec:eee:reveco:v:51:y:2017:i:c:p:660-676 is not listed on IDEAS
    3. Faff, Robert & Gharghori, Philip & Nguyen, Annette, 2014. "Non-nested tests of a GDP-augmented Fama–French model versus a conditional Fama–French model in the Australian stock market," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 627-638.
    4. repec:jfr:ijfr11:v:9:y:2018:i:1:p:189-202 is not listed on IDEAS
    5. Huang, Chia-Wei & Ho, Po-Hsin & Lin, Chih-Yung & Yen, Ju-Fang, 2014. "Firm age, idiosyncratic risk, and long-run SEO underperformance," International Review of Economics & Finance, Elsevier, vol. 34(C), pages 246-266.
    6. Abad, Pilar & Robles, M. Dolores, 2014. "Credit rating agencies and idiosyncratic risk: Is there a linkage? Evidence from the Spanish Market," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 152-171.
    7. Nath, Harmindar B. & Brooks, Robert D., 2015. "Assessing the idiosyncratic risk and stock returns relation in heteroskedasticity corrected predictive models using quantile regression," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 94-111.

    More about this item

    Keywords

    Idiosyncratic risk; Diversification; Information costs; Equity risk premium;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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