• Graduate program
  • Research
  • Summer School
  • Events
    • Summer School
      • Applied Public Policy Evaluation
      • Economics of Blockchain and Digital Currencies
      • Economics of Climate Change
      • Foundations of Machine Learning with Applications in Python
      • From preference to choice: The Economic Theory of Decision-Making
      • Gender in Society
      • Sustainable Finance
      • Business Data Science Summer School Program
    • Events Calendar
    • Events Archive
    • Tinbergen Institute Lectures
    • 16th Tinbergen Institute Annual Conference
    • Annual Tinbergen Institute Conference
  • News
  • Alumni
  • Magazine
Home | Events Archive | Asset Pricing with Unsystematic Risk
Seminar

Asset Pricing with Unsystematic Risk

  • Location
    Tinbergen Institute Amsterdam, room 1.01
    Amsterdam
  • Date and time

    December 06, 2023
    12:45 - 14:00

Abstract
We revise the conventional risk-return tradeoff that is exclusively based on systematic risk. We derive the stochastic discount factor (SDF) implied by the arbitrage-pricing theory, in which we explicitly allow compensation also for unsystematic risk while preserving no arbitrage. Empirically, we find that about 70% of this SDF's variation is explained by its unsystematic-risk component. Our SDF dominates traditional factor models and the state-of-the-art models of latent systematic risk in pricing a cross-section of assets in and out of sample. We outline an example of an equilibrium theory consistent with nonzero compensation for unsystematic risk and the specification of our SDF.