idiosyncratic volatility python

A tag already exists with the provided branch name. >> What was the purpose of laying hands on the seven in Acts 6:6, Checks and balances in a 3 branch market economy. /Filter /FlateDecode Many Git commands accept both tag and branch names, so creating this branch may cause unexpected behavior. @Prune. extracting digital artifacts from volatile memory samples and provide a Not the answer you're looking for? Has the cause of a rocket failure ever been mis-identified, such that another launch failed due to the same problem? Is it safe to publish research papers in cooperation with Russian academics? illness or job-loss) shocks. performed completely independent of the system being investigated but offer What is the mechanism action of H. pylori? >> How to drop rows of Pandas DataFrame whose value in a certain column is NaN. /Matrix [1 0 0 1 0 0] I have noted two slightly different definitions of idiosyncratic stock return volatility in: The code in this post is used to calculate Campbell and Takslers (2003) idiosyncratic stock return volatility, but it can be easily modified for other definitions. What is the association between H. pylori and development of. We establish a direct link between sophisticated investors in the option market, private stock market investors, and the idiosyncratic volatility (IVol) puzzle. Typically, [finance-type] people quote volatility in annualized terms of percent changes in price. To subscribe to this RSS feed, copy and paste this URL into your RSS reader. Here we've put 7 in order to have the past 7 days' historical daily returns. The Investment Algorithm is based on Fu (2009) that suggest positive and significant relationship between stock returns and expected idiosyncratic volatility. Windows symbols that cannot be found will be queried, downloaded, generated and cached. endobj 14 0 obj What happens if we multiply it by sqrt(252) though? We continue to observe a monotonic relationship between intercepts and IRPS, with high-minus-low spreads of between 0.35 and 0.41 . @zipline86. https://alphaarchitect.com/2014/12/19/a-quick-lesson-in-volatility-measures/, Improving the copy in the close modal and post notices - 2023 edition, New blog post from our CEO Prashanth: Community is the future of AI. Idiosyncratic means unique to an individual. Can Helicobacter pylori be caused by stress? A lot of concepts to take in, but you will see it will get easier over time. In order to see if we did a good job when computing historical volatility, we can easily plot it using the .plot() function. OHLC Volatility: Garman and Klass ( calc="garman.klass") The Garman and Klass estimator for estimating historical volatility assumes Brownian motion with . /Shading << /Sh << /ShadingType 3 /ColorSpace /DeviceRGB /Domain [0 1] /Coords [4.00005 4.00005 0.0 4.00005 4.00005 4.00005] /Function << /FunctionType 2 /Domain [0 1] /C0 [0.5 0.5 0.5] /C1 [1 1 1] /N 1 >> /Extend [true false] >> >> I also have the FF 3 factors. First step, we select two stocks and run Engle-Granger two step analysis. np.log(df['price']).diff() : this won't work for negative returns as log(0) = inf and log(x < 0) is undefined. Idiosyncratic risk refers to inherent risks exclusive to a company. But it is easy to see intuitively that multiplying it by the number of days would give you too big a number. Company managements decisions on financial policy, investment strategy, and operations are all idiosyncratic risks specific to a particular company and stock. /BBox [0 0 5669.291 8] 13 0 obj Specifically, we find that market and average idiosyncratic volatility and kurtosis are significantly priced by investors mainly in the long-run even if controlled by market moments and other factors, while skewness is mostly short-run phenomenon. Empirically, the idiosyncratic risk in a single-factor contemporaneous CAPM model with US equities is around 60-70%. A tag already exists with the provided branch name. Site map. 33 0 obj Thats a fundamental factor that might cause the broader markets to fluctuate. I've fixed up the title and the wording to be pretty unambiguously on-topic for SO. How about saving the world? What were the most popular text editors for MS-DOS in the 1980s? Campbell, J. Y. and Taksler, G. B. Thanks for contributing an answer to Quantitative Finance Stack Exchange! Actually, you did what they did by calculating (ret-mktret). >> Many Git commands accept both tag and branch names, so creating this branch may cause unexpected behavior. Expected idiosyncratic volatility is estimated with GJR-GARCH (3,1,1) model and expanding window training set. How do I get the row count of a Pandas DataFrame? . For partial functionality, comment out any unnecessary packages in requirements.txt prior to running the command. In the investing world, idiosyncratic versus systemic risk refers to risk related to a specific security. @Prune it's really ends up being about pandas usage . /Matrix [1 0 0 1 0 0] Investing in LQ45 constituents from 2015 to early 2020. MathJax reference. endstream Use Python to download lawsuit data from Stanford Law Schools Securities Class Action Clearinghouse, A test on Stata running speed on MacBook Pro (M1 Pro chip) and old Macs, My thoughts on Python for accounting research, Use Stata to do propensity score matching (PSM), Export a SAS dataset to Stata with all variable names converted to lowercase. Beta is not a measure of idiosyncratic risk. If prices can go negative intuitively using log returns isn't a good idea anyway since the intuition behind using it is because you assume prices can not go negative so the returns get smaller as you approach 0). Generate points along line, specifying the origin of point generation in QGIS. rstuiop1data, Demitry_01: t = 1 M j = 1 M R t, j 2 R t, j represents a 5 minute return during day t. Note, this expression assumes a mean of zero. linux, The idiosyncratic volatility for month t is then defined as a t the sample standard deviation of the residuals in the month. It is like some boats rising farther when the tide comes in, and dropping lower when it goes out. The objective of realized volatility models is to build a volatility time series from higher frequency data. Then it becomes the 10-day volatility annualized to a year? What was the purpose of laying hands on the seven in Acts 6:6. endobj * Download output dataset and remote signoff; Your email address will not be published. please include the following information when filing a bug: For community support, please join us on Slack: https://www.volatilityfoundation.org/slack, Web: https://www.volatilityfoundation.org, Blog: https://volatility-labs.blogspot.com, Email: volatility (at) volatilityfoundation (dot) org, 1.0.0 /Subtype /Form ]xlHRm;C.] 7p;Z-$H-5FP.4tO-'jQ'|lqvL~ExfZg1u%g'r"9%Bf5&d&5LPX*4Zb88TZ#%08%dtV #~=dP"RLc$ $\S6q%PJv~dS3!l. If nothing happens, download Xcode and try again. In order to get our stock prices data we use the yfinance library that utilizes yahoo finance to directly fetch financial data and transform it into a Pandas DataFrame. endobj Run python3 vol.py -h Importantly, I am trying to calculate Idiosyncratic Risk defined as follows: "the annualized standard deviation of the residuals from the regression of daily returns over the firm's fiscal year". endobj Thanks for sharing the code. This simple recognition results in a state-dependent idiosyncratic risk premium that is higher when average idiosyncratic volatility is low, and vice versa. py3, Status: Volatility is the world's most widely used framework for extracting digital We hypothesize that while hedge-fund activity would often reduce idiosyncratic risk, high initial levels of idiosyncratic risk might be further amplified due to fund loss limits. /Filter /FlateDecode How to specify the enddt? These two risks, size and value, also cannot be diversified away. npm run dev # or yarn dev pages/index.js CDS , Many other documents in this repository are dedicated to defining what Twisted is. source, Uploaded In the CRSP file that I got from WRDS, there is no such column. Your email address will not be published. I have basic finance background but I am trying to calculate idiosyncratic risk as measure for firm risk in my CEO gender research. 22 0 obj This is an anomaly because idiosyncratic volatility is viewed as a risk factorgreater volatility should be rewarded with higher, not . We compute the historical volatility using a rolling mean and std Plotting historical volatility In order to see if we did a good job when computing historical volatility, we can easily plot it using the .plot () function df["7d_vol"].plot(title="7 days close price historical volatility") The plot that shows the 7 days historical volatility Site design / logo 2023 Stack Exchange Inc; user contributions licensed under CC BY-SA. First, there is the idiosyncratic risk of investing in stocks. Calculate unsystematic-risk of a firm in a regression with SD or R2? The model provides a methodology for quantifying risk and translating that risk into estimates of expected return on equity. 1- What is (a) dataset in the code? << /S /GoTo /D (Outline0.3) >> /Resources 36 0 R The extraction techniques are the daily risk free rate. confronted by various types of risks, as foe example, covariate (e.g. /FormType 1 By the way, can we use the std1/std2/std3 directly as IVOL? One of the interesting puzzles in finance is that stocks with greater idiosyncratic volatility (IVOL) have produced lower returns (see an earlier post here ). The research of Bing and Kumar (2008) also shows that the mystery of idiosyncratic volatility mainly focuses on the stocks chosen by individual investors. Thank you. stream Ethical standards in asking a professor for reviewing a finished manuscript and publishing it together. The hashes to verify whether any of the symbol pack files have downloaded successfully or have changed can be found at: https://downloads.volatilityfoundation.org/volatility3/symbols/SHA256SUMS xP( << /S /GoTo /D (Outline0.5) >> We show that firms idiosyncratic volatility obeys a strong factor structure and that shocks to the common idiosyncratic volatility (CIV) factor are priced. There was a problem preparing your codespace, please try again. Section snippets Idiosyncratic volatility and expected returns. >> (It would imply the stock moves in the same direction every single day. 30 0 obj Also, reading, @Mad Physicist - does this calculation yield the DAILY volatility (because we have note multiplied by the sqrt(252) to annualize)? The definition of an idiosyncrasy is an unusual behavior, mannerism or reaction of a person or group of people. << If total energies differ across different software, how do I decide which software to use? /Resources 34 0 R Run some other plugins. Log returns (not simple returns) are used, The figure is annualized (usually assuming between 252 and 260 trading days per year), In the case Variance Swaps, log returns are not demeaned. Here you are! Measuring volatility is quite a big question in financial analysis. /Shading << /Sh << /ShadingType 3 /ColorSpace /DeviceRGB /Domain [0.0 8.00009] /Coords [8.00009 8.00009 0.0 8.00009 8.00009 8.00009] /Function << /FunctionType 3 /Domain [0.0 8.00009] /Functions [ << /FunctionType 2 /Domain [0.0 8.00009] /C0 [0.5 0.5 0.5] /C1 [0.5 0.5 0.5] /N 1 >> << /FunctionType 2 /Domain [0.0 8.00009] /C0 [0.5 0.5 0.5] /C1 [1 1 1] /N 1 >> ] /Bounds [ 4.00005] /Encode [0 1 0 1] >> /Extend [true false] >> >> Specifically, this code requires an input dataset that includes two variables: permno and enddt, where enddt is the date of interest. I have found the following on Alpha architect but I am unsure of how to interpret this and actually calculate the residuals. Log (x < 0) is undefined. Did the Golden Gate Bridge 'flatten' under the weight of 300,000 people in 1987? The Idiosyncratic Volatility Puzzle: Then and Now. Share Improve this answer edited Jun 21, 2012 at 18:22 chrisaycock 9,769 3 38 109 1. what I need the beta for? Learn more about Stack Overflow the company, and our products. There was a problem preparing your codespace, please try again. In the CAPM context, portfolio risk is represented by higher variance i.e. People are getting paid up to $100/hour for the right skills (insane right??) Many Git commands accept both tag and branch names, so creating this branch may cause unexpected behavior. Did the Golden Gate Bridge 'flatten' under the weight of 300,000 people in 1987? An idiosyncratic person is someone who does things in his own way. We can specify the number of periods we want to apply a method on. /FormType 1 Taking subarrays from numpy array with given stride/stepsize, Efficient multiple calculation per column in python. artifacts from volatile memory (RAM) samples. Limiting the number of "Instance on Points" in the Viewport. In this process, idiosyncratic volatility is measured by IV_FF3FM, which is the standard deviation of residuals from Fama-French three-factor model. (Model) This risk cannot be diversified away, no matter how many stocks, sector funds, or different asset classes you own. Please Here, I will attempt to explain not Learn more. This code requires at least 21 return observations (one-month trading days) over that 180-day period for a permnoto calculate its stock return volatility. Which one to choose? A market portfolio, by nature of being completely diversified, is subject only to systematic risk, or risk that affects the market as a whole, and not to unsystematic risk, which is the risk inherent to a particular asset class. (e.g. Effect of a "bad grade" in grad school applications. Another benefit of the rewrite is that Volatility 3 could be released under a custom license that was more aligned with the goals of the Volatility community, the Volatility Software License (VSL). How to check for #1 being either `d` or `h` with latex3? Which was the first Sci-Fi story to predict obnoxious "robo calls"? The CAPM is based on the idea that not all risks should affect asset prices. impact of shocks to income. Beta is a measure of the volatilityor systematic riskof a security or portfolio compared to the market as a whole. Please Furthermore, the CAPM states that only systematic risk matters, while . endobj Are there any canonical examples of the Prime Directive being broken that aren't shown on screen? How to calculate rolling / moving average using python + NumPy / SciPy? It began as a game, it is being used commercially in games, and it will be, I hope, an , Ssh_: In econometrics, idiosyncratic error is used to describe errorthat is, unobserved factors that impact the dependent variablefrom panel data that both changes over time and across units (individuals, firms, cities, etc.). (let me tell you they are not PHDs). The rest of this paper is organized as follows. what would be the fastest way i can calculate IV's. I have tried using py_vollib but it doesnt support vectorization. One thing that Einstein definitely wasnt was an idiot. Portfoliolevel analyses based on two different measures of idiosyncratic volatility (estimated using daily and monthly data), three weighting schemes (value-weighted, equal-weighted, inverse volatility-weighted), three breakpoints (CRSP, NYSE, equal market share), and two different samples (NYSE/AMEX/NASDAQ and NYSE) indicate that no robustly The formula is not taking the log of the difference but the difference of the log (of the price). Why are we supposed to square root the number of trading days? Based on the high-frequency data of Chinese stocks, this paper estimates the stock jumping risk, and utilizes Fama-French five-factor model to extract the idiosyncratic volatility, and further investigate their mutual influence by combining them into the asset return premium model. This estimate is often adjusted to provide a value on a monthly scale. VASPKIT and SeeK-path recommend different paths. Thus, the model is that any firm has a systematic risk which is $\beta$ times the move of the market. #[['trddt','stkcd','adj_close','size_free','size_tot']], #data=pd.read_pickle('F:/data/xccdata/PV')#[['stkcd','trddt','adj_close','size_free','size_tot']], #data['trddt']=pd.to_datetime(data['trddt'].astype(int).astype(str),format='%Y%m%d'), #data.drop_duplicates(subset=None, keep='last',inplace=True), #data.sort_index().to_pickle('F:/data/xccdata/PV_datetime'), 'F:/data/xccdata/essay/index_hs300_daily', 'F:/data/xccdata/essay/index_hs300_monthend', 'F:/data/xccdata/essay/index_hs300_monthstart', 'F:/data/xccdata/essay/index_hs300_monthly', #data=pd.read_pickle('/Users/harbes/data/xccdata/PV')[['trddt','stkcd','adj_close','size_free','size_tot']], 'F:/data/xccdata/essay/stocks_clsprc_monthstart', 'F:/data/xccdata/essay/stocks_clsprc_monthend', 'F:/data/xccdata/essay/stocks_rtn_monthly', 'F:/data/xccdata/essay/stocks_size_tot_monthend', #data_rtn_group_sum=DF((np.array(data_rtn_group)+1).cumprod(axis=0),index=rtn.index[1:],columns=list('12345')), 'F:/data/xccdata/essay/stocks_size_free_monthend', '/Users/harbes/data/xccdata/essay/SMB_tot_daily', '/Users/harbes/data/xccdata/essay/HML_tot_daily', '/Users/harbes/data/xccdata/essay/index_hs300_daily', #rtn.index=(rtn.index.year).astype(str)+'-'+(rtn.index.month).astype(str).str.zfill(2), #rtn['date']=(rtn.index.get_level_values(0).year).astype(str)+'-'+(rtn.index.get_level_values(0).month).astype(str).str.zfill(2), #rtn=rtn.set_index(['date',rtn.index.get_level_values(1)]), #err.loc[i,j]=rtn.loc[i,j]-alpha.loc[i,j]-beta_market.loc[i,j]*market.loc[i]-beta_SMB.loc[i,j]*SMB.loc[i]-beta_HML.loc[i,j]*HML.loc[i], '/Users/harbes/data/xccdata/essay/beta_market', '/Users/harbes/data/xccdata/essay/beta_HML', '/Users/harbes/data/xccdata/essay/beta_HML_daily', '/Users/harbes/data/xccdata/essay/alpha_daily', '/Users/harbes/data/xccdata/essay/beta_market_daily', '/Users/harbes/data/xccdata/essay/beta_SMB_daily', '/Users/harbes/data/xccdata/essay/rtn_daily', '/Users/harbes/data/xccdata/essay/error_daily'. /Shading << /Sh << /ShadingType 2 /ColorSpace /DeviceRGB /Domain [0.0 8.00009] /Coords [0 0.0 0 8.00009] /Function << /FunctionType 3 /Domain [0.0 8.00009] /Functions [ << /FunctionType 2 /Domain [0.0 8.00009] /C0 [1 1 1] /C1 [0.5 0.5 0.5] /N 1 >> << /FunctionType 2 /Domain [0.0 8.00009] /C0 [0.5 0.5 0.5] /C1 [0.5 0.5 0.5] /N 1 >> ] /Bounds [ 4.00005] /Encode [0 1 0 1] >> /Extend [false false] >> >> memory, Apr 12, 2023 The CAPM was developed in the early 1960s by William Sharpe (1964), Jack Treynor (1962), John Lintner (1965a, b) and Jan Mossin (1966). /ProcSet [ /PDF ] /Subtype /Form Here we compute the 7 days historical volatility using the pandas .rolling() method. So what you have is a 'per day' std value. Unsystematic/Idiosyncratic/Firm-specific volatility/variance in the market model? . endobj Section II documents that firms with high idiosyncratic volatility have very low average returns. First, we estimate three-factor models for the 1931-1973 period. Simplistically, the risk (volatility or standard deviation) of the stock is composed of two pieces: If all firms had the same beta, the market risk would be the same for all firms, and would be the index risk. Python Pythonpandasstatsmodels.formula.api import pandas as pd import statsmodels.formula.api as smf 1 2 2015-2019 Another benefit ', referring to the nuclear power plant in Ignalina, mean? The project was intended to address many of the Negative prices (or interest rates for that matter) require a different assumption on the underlying process, specifically normal vol. In Section I, we examine how aggregate volatility is priced in the cross-section of stock returns. Once the criteria of cointegration is met, we standardize the residual and set one sigma away (two tailed) as the threshold. Both versions of the IR-CAPM predict that an asset's idiosyncratic skewness and idiosyncratic volatility are priced in equilibrium. for more information on a particular command. the Volatility Software License (VSL). An example of idiosyncrasy is someone being allergic to air. To review, open the file in an editor that reveals hidden Unicode characters. Uploaded endobj So, in essence, [finance-type] people know that each instrument has its own annoying peculiarities. To enable the full range of Volatility 3 functionality, use a command like the one below. Developed and maintained by the Python community, for the Python community. Connect and share knowledge within a single location that is structured and easy to search. The empirical results show that: (1) Both the idiosyncratic volatility and jump risk should be independently priced; (2) When added the idiosyncratic volatility into jump risk-return model, the jump measurement components have less explanatory power for stock premium, indicating these two risk factors that contains common information for the stock premium; (3) The explanatory effects of idiosyncratic volatility and jump risk on return mainly origins from the non-linear form of their interaction, which provides empirical experience for theoretical analysis of the specific forms of risk. Some of the links in the explanation I have don't work so I am unsure how exactly I need to do the following: Simplistically, the risk (volatility or standard deviation) of the stock is composed of two pieces: 1) the market risk, and 2) the idiosyncratic risk of the firm If all firms had the same beta, the market risk would be the same for all firms, and would be the index risk. 565), Improving the copy in the close modal and post notices - 2023 edition, New blog post from our CEO Prashanth: Community is the future of AI. stream 21 0 obj For this reason I really need to understand what I am doing so that I can code it in Stata. xP( If you want to transform it into expected move for a whole year you multiply it by the square root of the number of days. << I also consider the properties of changes to idiosyncratic volatility. idiosyncratic volatility are negatively correlated with dividend shocks We also assume that shocks to systematic and idiosyncratic volatility are positively correlated This is consistent with empirical evidence in Barinov (2013), Bartram et al. Volatility 3 requires Python 3.7.0 or later. /Filter /FlateDecode what Twisted is, but what it should be, once Ive met my goals with it. 5 We conduct two sets of out-of-sample tests. Does Pandas have built-in functionality for doing something like this? Apr 12, 2023 Yet idiosyncratic and idiot are related. My current code correctly does it in this form: This seems to me very inefficient. << /S /GoTo /D (Outline0.1) >> idiosyncratic volatility, we still observe economically large premiums in both large and small stocks. Given my answer below, I think this question qualifies for SO. What's the cheapest way to buy out a sibling's share of our parents house if I have no cash and want to pay less than the appraised value? Mac and Linux symbol tables must be manually produced by a tool such as dwarf2json. The Alpha Architect link contains an Excel example of which I am basing my questions. Browse other questions tagged, Where developers & technologists share private knowledge with coworkers, Reach developers & technologists worldwide, Improvement of working code should be in CodeReview.StackExchange.com. The capital asset pricing model (CAPM) tries to estimate how much you can expect to earn given the amount of risk. ( C i C i 1) a n d r = r 1 + r 2 + + r n 1 n 1. First, Twisted should be fun. Are you sure you want to create this branch? How a top-ranked engineering school reimagined CS curriculum (Ep. So, idiosyncratic risk affects only one security; systemic risk affects all (or at least many) securities. all systems operational. Much appreciated. OP is really asking if there is a built-in method for doing a sliding window. Finally, Section III concludes. https://downloads.volatilityfoundation.org/volatility3/symbols/MD5SUMS. Learn the tools that big banks and quants companies are using for complex financial modeling. Beta is used in the capital asset pricing model (CAPM), which describes the relationship between systematic risk and expected return for assets (usually stocks). Apologies, have been searching around and keep getting confused. (2003), Equity Volatility and Corporate Bond Yields. /Matrix [1 0 0 1 0 0] Moreover, the return spread between the lowest and highest quintile portfolio sorted by the conditional long-run idiosyncratic volatility is correlated with the return spread sorted by the realized idiosyncratic volatility, with a coe cient of 0.95. I didnt see that. This calculation uses the formula Idiosyncratic Volatility = Total Variance Market Variance, where each of the variances is the square of standard deviation or volatility. Looking for job perks? /BBox [0 0 8 8] Why exactly it is square root, I cannot explain. @carl I think this does work for negative returns. The code in this post is used to calculate Campbell and Taksler's (2003) idiosyncratic stock return volatility, but it can be easily modified for other definitions. What Is Beta? Asking for help, clarification, or responding to other answers. Symbol table packs for the various operating systems are available for download at: https://downloads.volatilityfoundation.org/volatility3/symbols/windows.zip The risk of a portfolio comprises systematic risk, also known as undiversifiable risk, and unsystematic risk which is also known as idiosyncratic risk or diversifiable risk. It's not them. Why xargs does not process the last argument? Requirements. In 2019, the Volatility Foundation released a complete rewrite of the Links: We find that on average throughout our sample, the idiosyncratic component represents 85 percent of the total average stock variance according to the market model, and 80 percent according to the Fama-French model. 37 0 obj The traditional idiosyncratic volatility for stock i in month t, \(IV_{it}\), is the standard deviation of the regression residuals in Eq. The most commonly referenced type of volatility is realized volatility which is the square root of realized variance. * Remote signon and upload input database including permno and date; * Compute abnormal returns for all models for each trading day; /*number of observations used in estimation*/. 29 0 obj 25 0 obj Thanks, @RockytheOwl. https://downloads.volatilityfoundation.org/volatility3/symbols/windows.zip, https://downloads.volatilityfoundation.org/volatility3/symbols/mac.zip, https://downloads.volatilityfoundation.org/volatility3/symbols/linux.zip, https://downloads.volatilityfoundation.org/volatility3/symbols/SHA256SUMS, https://downloads.volatilityfoundation.org/volatility3/symbols/SHA1SUMS, https://downloads.volatilityfoundation.org/volatility3/symbols/MD5SUMS, https://volatility3.readthedocs.io/en/latest/, The operating system used to run Volatility, The version of Python used to run Volatility, The suspected operating system of the memory sample, The complete command line you used to run Volatility. You took the 'std' of that. /Length 15 Please try enabling it if you encounter problems. 34 0 obj I have options data about 1+ million rows for which i want to calculate implied volatility. Campbell, Lo, and MacKinlay (1997, p. 156) call this a market-adjusted-return model. What is Wario dropping at the end of Super Mario Land 2 and why? Donate today! << Volatility 3 requires Python 3.7.0 or later. Can you still use Commanders Strike if the only attack available to forego is an attack against an ally? You're normalizing the average under the square root by the total number of days. Studies show that most of the variation in risk that individual stocks face over time is created by idiosyncratic risk. A security plotted above the security market line is considered undervalued and one that is below SML is overvalued. Idiosyncratic risk can be thought of as the factors that affect an asset such as the stock and its underlying company at the microeconomic level.
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