Idiosyncratic Risk

Idiosyncratic Risk

Unsystematic risk or risk that is uncorrelated to the overall market risk. In other words, the risk that is firm-specific and can be diversified through holding a portfolio of stocks.

Nonsystematic Risk

Risk that is unique to a certain asset or company. An example of nonsystematic risk is the possibility of poor earnings or a strike amongst a company's employees. One may mitigate nonsystematic risk by buying different of securities in the same industry and/or by buying in different industries. For example, a particular oil company has the diversifiable risk that it may drill little or no oil in a given year. An investor may mitigate this risk by investing in several different oil companies as well as in companies having nothing to do with oil. Nonsystematic risk is also called diversifiable risk. See also: Undiversifiable risk.
References in periodicals archive ?
The ETF offers access to the global automarket while also diversifying "without idiosyncratic risk," he said.
Following Alvarez and Jermann (2001) and Storesletten, Telmer, and Yaron (2004), we calibrate the shock process by two moments: the standard deviation of idiosyncratic shocks and the first-order autocorrelation of the shocks, except we eliminate the countercyclical variation in idiosyncratic risk. The Markov process for the log of the nondiversified income share, ln[eta], has a standard deviation of 0.71 and an autocorrelation of 0.89.
(2010), however, argue that idiosyncratic risk, which is an arbitrage cost, contributes to heavily shorted stocks' overvaluation.
On the flipside, Lee reiterates a Sell rating on SolarEdge (SEDG), which he sees as having the highest idiosyncratic risk and lower estimates owing to recent M&A that appears both dilutive and a key investor focus point.
A limitation of these studies is that they fail to provide direct test of whether the accrual mispricing is indeed attributed to small firms or not, while controlling for the disparity in firm characteristics, such as idiosyncratic risk and transaction costs, that affect future returns and probably correlate with firm size.
Keywords: Capital Asset Price Modelling; CAPM; Stock Returns; Pakistan Stock Exchange (PSX), Idiosyncratic Risk.
* This article examines three potential sources of the persistent dislocation: (1) increased idiosyncratic risk, (2) strategic positioning in CDS products by institutional investors, and (3) post-crisis regulatory changes.
Idiosyncratic risk can be managed through diversification, risk limits and prudent underwriting, but cyberrisk presents a systemic aggregation challenge as well.
A second implication of the theoretical model is the one that relates TFP to the level of firm idiosyncratic risk. The model predicts that in lower productivity environments, firms will have a smaller market exposure, and be riskier on average.
H2: There exists a significant relationship between SPS and Idiosyncratic risk
Conversely, in what no CAPM validity is concerned, there are studies such as the one by Galdi and Securato (2007), who have analysed the relationship between the idiosyncratic risk and the returns of a diversified portfolio of Brazilian market assets.
Appendix A shows that by reparametrizing the two sources of risk through independent Wieners, one can isolate the mortality risk that affects generations x and y (the common risk) from the risk that affects only y (the idiosyncratic risk).