Date of Award
Economics and Finance
M Kabir Hassan
James Ronnie Davis
Standard asset pricing theories suggest that only systematic risk is priced. Empirical studies report a relationship between idiosyncratic volatility or risk (IVOL) and asset price. The most common explanation for this anomaly is that households under-diversify creating a Bad Model problem. This paper uses an Intermediary Asset Pricing Model (IAPM) as a way to control for under-diversification in evaluating the relationship between IVOL and asset price. We find that IVOL premia is lower in an IAPM. Our findings indicate that under-diversification can explain the anomaly partially.
Ahmed, Hasib, "Pricing of Idiosyncratic Risk in an Intermediary Asset Pricing Model" (2019). University of New Orleans Theses and Dissertations. 2659.