Empirical Study On The Pricing Power Of Idiosyncratic Risk Factor

Traditional asset pricing theory divides risks into market risks and idiosyncratic risks.The traditional asset pricing model believes that investors can fully diversify the risk of stock characteristics by constructing investment portfolios,and only market risks can cause changes in the equilibrium price of assets.However,due to friction and incomplete information in the market,and due to factors such as capital constraints and investment preferences,investors do not hold the market portfolio,and idiosyncratic risks have not been fully dispersed.The influence of idiosyncratic risk on the expected return of stocks has been widely confirmed.Therefore,the relationship between idiosyncratic risk and stock returns is tested through empirical research,and on this basis,a pricing factor-idiosyncratic risk factor(IVF)is constructed to further explore characteristics The pricing power of risk factors is particularly important.Based on the data from January 2009 to December 2019,and on the basis of reviewing the development history and research status of asset pricing at home and abroad,this paper studies whether idiosyncratic risks can be a risk factor for the ability to predict stock returns.The two dimensions of and cross-section study the pricing power of idiosyncratic risk factors,and then control the one-month effect and sub-sample analysis to test the robustness of the pricing power of idiosyncratic risk factors.Research indicates:(1)In portfolio analysis,idiosyncratic risk has a significant positive impact on the crosssectional return of stocks,and this positive impact is still significant after controlling for the size and book-to-market ratio factors;in cross-sectional regression analysis,idiosyncratic risk has a significant positive effect on the cross-sectional return of stocks.With significant positive forecasting ability,investors who are long high-risk stocks and short low-risk stocks are expected to obtain excess returns.The idiosyncratic risk can be used as a pricing factor to further study the pricing power of this factor.(2)Construct idiosyncratic risk factors and study their pricing power in time series.The experimental results show that idiosyncratic risk factors have significant explanatory power for market portfolio returns,and under different market risk conditions,idiosyncratic risk factors have a positive explanatory effect on market portfolio returns,but the market risk is relatively high.In the state of,idiosyncratic risk factors have stronger interpretive power for portfolio returns and higher pricing efficiency.(3)Before studying the pricing power of idiosyncratic risk factors on cross-sectional portfolios,we first use the GRS test and the model validity test of Fama and French(2015)to verify that idiosyncratic risk factors can improve the pricing power of the model.After that,Fama-MacBeth two-stage regression was used to test the pricing power of idiosyncratic risk factors on the size-trait risk cross-section combination and the size-book-to-market value ratio cross-section combination.The test results of the risk sensitivity coefficient and the risk price all showed that the trait risk factor paired The cross-section portfolio has pricing power.