Idiosyncratic risk: independent risk that affects wealth.
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 with a positive
state-dependent premium for idiosyncratic risk both In the
US and In other developed markets.
Where does it take place?
Université du Luxembourg
JFK Building 29
Boulevard Kennedy L-1855 Luxembourg Ground Floor
Nancy-Metz Room
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