Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/253602 
Year of Publication: 
2021
Citation: 
[Journal:] Quantitative Economics [ISSN:] 1759-7331 [Volume:] 12 [Issue:] 2 [Publisher:] The Econometric Society [Place:] New Haven, CT [Year:] 2021 [Pages:] 625-646
Publisher: 
The Econometric Society, New Haven, CT
Abstract: 
In Merton (1987), idiosyncratic risk is priced in equilibrium as a consequence of incomplete diversification. We modify his model to allow the degree of diversification to vary with average idiosyncratic volatility. This simple recognition results in a state-dependent idiosyncratic risk premium that is higher when average idiosyncratic volatility is low, and vice versa. The data appear to be consistent a positive state-dependent premium for idiosyncratic risk both in the US and other developed markets.
Subjects: 
factor models
Idiosyncratic risk
risk premium asset pricing
JEL: 
G11
G12
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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