OBJECTIVE: To investigate the effect of racism, own-group ethnic density, diversity and deprivation on adolescent trajectories in psychological well-being. DESIGN: Multilevel models were used in longitudinal analysis of psychological well-being (total difficulties score (TDS) from Goodman's Strengths and Difficulties Questionnaire, higher scores correspond to greater difficulties) for 4782 adolescents aged 11-16 years in 51 London (U.K.) schools. Individual level variables included ethnicity, racism, gender, age, migrant generation, socio-economic circumstances, family type and indicators of family interactions (shared activities, perceived parenting). Contextual variables were per cent eligible for free school-meals, neighbourhood deprivation, per cent own-group ethnic density, and ethnic diversity. RESULTS: Ethnic minorities were more likely to report racism than whites. Ethnic minority boys (except Indian boys) and Indian girls reported better psychological well-being throughout adolescence compared to their white peers. Notably, lowest mean TDS scores were observed for Nigerian/Ghanaian boys, among whom the reporting of racism increased with age. Adjusted for individual characteristics, psychological well-being improved with age across all ethnic groups. Racism was associated with poorer psychological well-being trajectories for all ethnic groups (p<0.001), reducing with age. For example, mean difference in TDS (95% confidence interval) between boys who experienced racism and those who did not at age 12 years=1.88 (+1.75 to +2.01); at 16 years = +1.19 (+1.07 to +1.31). Less racism was generally reported in schools and neighbourhoods with high than low own-group density. Own ethnic density and diversity were not consistently associated with TDS for any ethnic group. Living in more deprived neighbourhoods was associated with poorer psychological well-being for whites and black Caribbeans (p<0.05). CONCLUSION: Racism, but not ethnic density and deprivation in schools or neighbourhoods, was an important influence on psychological well-being. However, exposure to racism did not explain the advantage in psychological well-being of ethnic minority groups over whites.