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Conditional pricing of risks

Author

Listed:
  • Ron Yiu Wah Ho
  • Roger Strange
  • Jenifer Piesse

Abstract

Purpose - This paper aims to examine the pricing effects of risks conditional on market situations. Design/methodology/approach - The model used to test for the conditional pricing effects of risks is a modified version of Pettengillet al.'s cross‐sectional regression model, based on Hong Kong equity data. Findings - The paper postulates a five‐factor asset pricing model, which hypothesizes that five risk factors are relevant in the pricing of equity stocks, namely beta, size, book‐to‐market equity, market leverage, and share price, but conditional on market situations, i.e. whether the market is up or down. Practical implications - The findings enrich our understanding of capital market behaviour, and should prove helpful to investors and corporate managers in both their domestic and international financial decisions. Originality/value - This study yields important results on a Chinese market, which lend support to the conditional risk pricing hypotheses originally developed in the US, implying that conditional risk pricing is applicable not only in the US market but also in other markets around the globe.

Suggested Citation

  • Ron Yiu Wah Ho & Roger Strange & Jenifer Piesse, 2013. "Conditional pricing of risks," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 40(1), pages 88-97, January.
    • Handle: RePEc:eme:jespps:v:40:y:2013:i:1:p:88-97
    DOI: 10.1108/01443581311283529
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