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Risk components in UK cross-sectional equities: evidence of regimes and overstated parametric estimates

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  • Rossi, Francesco

Abstract

We study the behavior and interaction of systematic and idiosyncratic components of risk in a cross-section of U.K. stocks. We find no clear evidence of a trend in any component of total risk, but we document different “regimes” in the behavior of each component of total risk, in their correlation patterns and thus in their contribution to aggregate risk. Comparing parametric and non-parametric estimates of residual risk, we find the former to significantly overstate diversifiable risk, opposite to some previous findings for the U.S. market, with the difference being very large especially when we include an industry component.

Suggested Citation

  • Rossi, Francesco, 2011. "Risk components in UK cross-sectional equities: evidence of regimes and overstated parametric estimates," MPRA Paper 38682, University Library of Munich, Germany, revised 31 Mar 2012.
    • Handle: RePEc:pra:mprapa:38682
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    References listed on IDEAS

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    More about this item

    Keywords

    Idiosyncratic risk; residual risk; systematic risk; non parametric estimates; cross-sectional equities; cross-sectional risk; equities; U.K.; industry risk; correlation; regimes; factor models;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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