Skip to main content

Strategic risk shifting and idiosyncratic volatility

A recent research paper, “Strategic risk shifting and idiosyncratic volatility”, by Dr Nicholas Chen with his co-authors, has been accepted for presentation at the 2015 Western Finance Association Meetings. The conference is highly prestigious with an acceptance rate from submitted papers of only 8%.

Nicholas’s work helps advance our understanding of asset pricing and capital markets. More specifically, while standard asset pricing models argue that idiosyncratic risk should not be priced, the new research theoretically and empirically demonstrates that when stock holders can manipulate a firm’s idiosyncratic risk profile to maximise their own wealth at the cost of bond holders, idiosyncratic risk will be priced in stock returns. They show that this unequal risk-sharing between equity and debt holders can explain a very important puzzle in the asset pricing literature, namely the negative relationship between idiosyncratic risk and future stock returns. Nicholas’s research will help advance our understanding on this well-known asset pricing puzzle. The full working paper is available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2417965 .

Published 6 March 2015
Topics:
Research news

You might also like

Industry Insights: Investing for Impact

19 January 2018
Evita Zanusso from Big Society Capital was our speaker this week, and she gave us an overview of 'Social Impact Investment': investments that have a social benefit as well as a financial return. Dan Robertson from the Finance Society has provided us with a review:
Industry Insights reviews

The markets got it wrong again - time to bet on uncertainty?

9 June 2017
The markets got it wrong, again

Professor Scott-Quinn's opinion sought by the FT on the government's new banking regulatory body

18 June 2010
Professor Brian Scott-Quinn's opinion was sought by the Financial Times on the new coalition government's regulatory body - the Prudential Regulatory Authority.