Publication Type
Conference Paper
Version
acceptedVersion
Publication Date
7-2010
Abstract
Theories predict that, due to investor under-diversification, idiosyncratic risk is positively priced in expected stock returns. Empirical studies based on various methodologies yield mixed evidence. This study circumvents the debate on methodological issues and traces the pricing of idiosyncratic risk to its economic source – investor under-diversification. Assuming that institutional investors tend to hold more diversified portfolios and thus care little about idiosyncratic risk relative to individual investors, we find that the positive relation between idiosyncratic risk and stock returns is significantly stronger (weaker) in stocks that are held and traded more by individual (institutional) investors. In addition, the pricing of idiosyncratic risk becomes weaker over time as institutional investors become more dominant in the US equity market.
Keywords
Idiosyncratic risk, Stock returns, Diversification, Institutional investors
Discipline
Finance and Financial Management | Portfolio and Security Analysis
Research Areas
Finance
Publication
Financial Management Association Asian Conference, Singapore, 14-16 July 2010
First Page
1
Last Page
36
City or Country
Singapore
Citation
FU, Fangjian.
Investor Diversification and the Pricing of Idiosyncratic Risk. (2010). Financial Management Association Asian Conference, Singapore, 14-16 July 2010. 1-36.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/3042
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://www.fma.org/Singapore/Papers/InvestorDiversificationAndThePricingOfIdiosyncraticRisk.pdf