Conditional pricing of risks

Abstract

Purpose

This paper aims to examine the pricing effects of risks conditional on market situations.

Design/methodology/approach

The model used to test for the conditional pricing effects of risks is a modified version of Pettengill et al.'s cross‐sectional regression model, based on Hong Kong equity data.

Findings

The paper postulates a five‐factor asset pricing model, which hypothesizes that five risk factors are relevant in the pricing of equity stocks, namely beta, size, book‐to‐market equity, market leverage, and share price, but conditional on market situations, i.e. whether the market is up or down.

Practical implications

The findings enrich our understanding of capital market behaviour, and should prove helpful to investors and corporate managers in both their domestic and international financial decisions.

Originality/value

This study yields important results on a Chinese market, which lend support to the conditional risk pricing hypotheses originally developed in the US, implying that conditional risk pricing is applicable not only in the US market but also in other markets around the globe.

Citation

Yiu Wah Ho, R., Strange, R. and Piesse, J. (2013), "Conditional pricing of risks", Journal of Economic Studies, Vol. 40 No. 1, pp. 88-97. https://doi.org/10.1108/01443581311283529