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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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    2. 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.
    3. Aman, Hiroyuki & Moriyasu, Hiroshi, 2017. "Volatility and public information flows: Evidence from disclosure and media coverage in the Japanese stock market," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 660-676.
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    5. Mohamed Masry & Heba El Menshawy, 2018. "The Impact of Unsystematic Risk on Stock Returns in an Emerging Capital Markets (ECM¡¯s) Country: An Empirical Study," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 9(1), pages 189-202, January.
    6. 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.
    7. Azra Zaimovic & Adna Omanovic & Almira Arnaut-Berilo, 2021. "How Many Stocks Are Sufficient for Equity Portfolio Diversification? A Review of the Literature," JRFM, MDPI, vol. 14(11), pages 1-30, November.
    8. 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.
    9. María Mar Miralles-Quirós & José Luis Miralles-Quirós, 2021. "Sustainable Finance and the 2030 Agenda: Investing to Transform the World," Sustainability, MDPI, vol. 13(19), pages 1-6, September.
    10. 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.

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    More about this item

    Keywords

    Idiosyncratic risk; Diversification; Information costs; Equity risk premium;
    All these keywords.

    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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