Non-systematic Risks Are Priced

Assets pricing theory basically moved forward along the linearization and the non-linearity two clues. Assets pricing theory linearization research initially started with quantification model establishment under indefinite condition. Markowitz established "mean - variance" analysis frame as well as the investor behavior standardized pattern. Under this frame, investor's property choice is transformed to linear programming question. Sharpe, Lintner, and Black considered the market condition if all investors follow Markowitz's definition of the investor, proposed the famous Capital Asset Pricing Model (CAPM). From then on, financial economists have worked in several directions to improve CAPM. Relaxing the underlying assumptions of the model developed various forms of multi- factors models. However, scarcely any research has explicitly proposed that idiosyncratic risk should be priced.This paper attempts to discuss the idiosyncratic risk under the CAPM frame in the stock pricing reflection, involving general balanced analysis, the concept logic analysis, the model constructs, the empirical research and so on the many kinds of methods, closely centers on the risk concept, tries to prove that idiosyncratic risk should be priced. This paper starts with interrogatory with CAPM; analyzes the most basic risk concept, the risk expression method; clarify the concept of systematic risk with idiosyncratic risk; questions about marketing portfolio, diversification investment. Then, we accept the CAPM as a reasonable first order approximation. However, when the model is based on friction market and"constrained"investors is unable to hold the market portfolio for various reasons, we can get the conclusion that idiosyncratic risk is priced. In order to provide the empirical testimony, we imitate FF (1,993) three factors model to establish a model contained idiosyncratic risk factor, and use the Shanghai A market data to carry on the examination.The paper altogether divides five parts. The first part makes a brief review on the assets pricing theory development. The CAPM has ruled...