Empirical Analysis of Stock Systemic Risk and Idiosyncratic Risk Pricing Capability—Comparison of Conditional and Unconditional CAPM

Abstract

This paper proposed the view that idiosyncratic risk pricing ability may come from systemic risk pricing ability spillover, and studies the relationship of pricing ability between systemic risk and idiosyncratic risk of stock, based on the conditional and unconditional CAPM, by using the method of two-stage Fama-MacBeth regression. From the results of cross-sectional regression, adding idiosyncratic risk could increase the risk explanatory power of earnings, and the idiosyncratic volatility has a significant positive risk premium. However, with the improvement of the CAPM, the marginal contribution of the idiosyncratic risk to improve the explanatory ability has declined. In addition, this paper compares Fama-French double-packet portfolios and the time-delay factors of conditional CAPM, and finds that the time-lag factor of conditional CAPM has a high correlation with the size and BM of the portfolio. This means that small-size or low-value stock may have a more significant time lag effect.