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 ?
This indicates that idiosyncratic risk is higher for SMEs.
This is a brilliant contribution as a decade of research into idiosyncratic risk had stumbled against one after another difficulty, and had great trouble demonstrate even the possibility of substantial effects.
Emphasize the role of three features:(i) asymmetric information in interbank markets;(ii) maturity mismatch in the banks balance sheets;(iii) the paradox of securitization, thereby a deeper diversification of idiosyncratic risk leads to a simultaneous increase in the sensitivity of banks balance sheets to aggregate risk.
Using four different proxies for a firm's investor base we demonstrate that idiosyncratic risk premiums are larger for neglected stocks and smaller or economically insignificant for visible stocks.
2] and thus the farmer will only face the idiosyncratic risk (compare with Equation (9b)).
This makes a CCA-approach a promising method for estimating the implied volatilities of transactions in which shareholders and lenders bear a certain amount of idiosyncratic risk.
In particular, the OTC has relative advantages in hedging idiosyncratic risk, and disadvantages in dealing with credit risk and credit risk aversion.
Specifically, we examine the level of idiosyncratic risk for a sample of firms who have been rated on their corporate social responsibility [CSR].
H2: There exists a significant relationship between SPS and Idiosyncratic risk
In this article, we explore the possibility that aggregate idiosyncratic risk confounds the time-series relation between aggregate liquidity and conditional equity premium.
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.
The investor is exposed to company-specific risk for each position in the concentrated portfolio, but what if that idiosyncratic risk can be significantly diminished?