Hostname: page-component-8448b6f56d-gtxcr Total loading time: 0 Render date: 2024-04-17T09:26:23.070Z Has data issue: false hasContentIssue false
  • English
  • Français

Aggregate Idiosyncratic Volatility

Published online by Cambridge University Press:  17 October 2012

Geert Bekaert ,
Robert J. Hodrick  and
Xiaoyan Zhang
Geert Bekaert
Affiliation:
gb241@columbia.edu
Robert J. Hodrick
Affiliation:
rh169@columbia.edu, Business School, Columbia University, 3022 Broadway, New York, NY 10027
Xiaoyan Zhang
Affiliation:
zhang654@purdue.edu, Krannert School of Management, Purdue University, 403 W State St, West Lafayette, IN 47907
Get access Rights & Permissions [Opens in a new window]

Abstract

We examine aggregate idiosyncratic volatility in 23 developed equity markets, measured using various methodologies. We find no evidence of upward trends after extending the sample to 2008. Instead, idiosyncratic volatility is well described by a stationary autoregressive process that occasionally switches into a higher-variance regime that has relatively short duration. We also document that idiosyncratic volatility is highly correlated across countries. Most of the time variation in idiosyncratic volatility can be attributed to variation in a growth opportunity proxy, total (U.S.) market volatility, and in most specifications, the variance premium, a business cycle sensitive risk indicator.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 6 , December 2012 , pp. 1155 - 1185
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aktas, N.; De Bodt, E.; and Cousin, J.. “Assessing the Power and the Size of the Event Study Method through the Decades.” Working Paper, Skema Business School (2007).CrossRefGoogle Scholar
Anderson, E. W.; Ghysels, E.; and Juergens, J. L.. “The Impact of Risk and Uncertainty on Expected Returns.” Journal of Financial Economics, 94 (2009), 233–263.CrossRefGoogle Scholar
Ang, A., and Bekaert, G.. “International Asset Allocation with Regime Shifts.” Review of Financial Studies, 15 (2002), 1137–1187.CrossRefGoogle Scholar
Ang, A.; Hodrick, R. J.; Xing, Y.; and Zhang, X.. “The Cross-Section of Volatility and Expected Returns.” Journal of Finance, 61 (2006), 259–299.CrossRefGoogle Scholar
Ang, A.; Hodrick, R. J.; Xing, Y.; and Zhang, X.. “High Idiosyncratic Volatility and Low Returns: International and Further U.S. Evidence.” Journal of Financial Economics, 91 (2009), 1–23.CrossRefGoogle Scholar
Baele, L.; Bekaert, G.; and Inghelbrecht, K.. “The Determinants of Stock and Bond Return Comovements.” Review of Financial Studies, 23 (2010), 2374–2428.CrossRefGoogle Scholar
Bai, J., and Perron, P.. “Estimating and Testing Linear Models with Multiple Structural Changes.” Econometrica, 66 (1998), 47–78.CrossRefGoogle Scholar
Bali, T. G.; Cakici, N.; and Levy, H.. “A Model-Independent Measure of Aggregate Idiosyncratic Risk.” Journal of Empirical Finance, 15 (2008), 878–896.CrossRefGoogle Scholar
Bali, T. G., and Hovakimian, A.. “Volatility Spreads and Expected Stock Returns.” Management Science, 55 (2009), 1797–1812.CrossRefGoogle Scholar
Bartram, S. M.; Brown, G.; and Stulz, R. M.. “Why Are U.S. Stocks More Volatile?” Journal of Finance, 67 (2012), 1329–1370.CrossRefGoogle Scholar
Bekaert, G., and Engstrom, E.. “Asset Return Dynamics under Bad Environment-Good Environment Fundamentals.” Working Paper, National Bureau of Economic Research (2010).CrossRefGoogle Scholar
Bekaert, G.; Hodrick, R. J.; and Zhang, X.. “International Stock Return Comovements.” Journal of Finance, 64 (2009), 2591–2626.CrossRefGoogle Scholar
Bennett, J. A.; Sias, R. W.; and Starks, L. T.. “Greener Pastures and the Impact of Dynamic Institutional Preferences.” Review of Financial Studies, 16 (2003), 1203–1238.CrossRefGoogle Scholar
Bollerslev, T.; Tauchen, G. E.; and Zhou, H.. “Expected Stock Returns and Variance Risk Premia.” Review of Financial Studies, 22 (2009), 4463–4492.CrossRefGoogle Scholar
Brandt, M. W.; Brav, A.; Graham, J.; and Kumar, A.. “The Idiosyncratic Volatility Puzzle: Time Trend or Speculative Episodes?” Review of Financial Studies, 23 (2010), 863–899.CrossRefGoogle Scholar
Brown, G., and Kapadia, N.. “Firm-Specific Risk and Equity Market Development.” Journal of Financial Economics, 84 (2007), 358–388.CrossRefGoogle Scholar
Bunzel, H., and Vogelsang, T. J.. “Powerful Trend Function Tests That Are Robust to Strong Serial Correlation, with an Application to the Prebisch-Singer Hypothesis.” Journal of Business and Economic Statistics, 23 (2005), 381–394.CrossRefGoogle Scholar
Campbell, J. Y.; Lettau, M.; Malkiel, B. G.; and Xu, Y.. “Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk.” Journal of Finance, 56 (2001), 1–43.CrossRefGoogle Scholar
Cao, C.; Simin, T.; and Zhao, J.. “Can Growth Options Explain the Trend in Idiosyncratic Risk?” Review of Financial Studies, 21 (2008), 2599–2633.CrossRefGoogle Scholar
Carr, P., and Wu, L.. “Variance Risk Premiums.” Review of Financial Studies, 22 (2009), 1311–1341.CrossRefGoogle Scholar
Chun, H.; Kim, J.-W.; Morck, R.; and Yeung, B.. “Creative Destruction and Firm-Specific Performance Heterogeneity.” Journal of Financial Economics, 89 (2008), 109–135.CrossRefGoogle Scholar
Comin, D., and Mulani, S.. “Notes: Diverging Trends in Aggregate and Firm Volatility.” Review of Economics and Statistics, 88 (2006), 374–383.CrossRefGoogle Scholar
Comin, D., and Philippon, T.. “The Rise in Firm-Level Volatility: Causes and Consequences.” In NBER Macroeconomics Annual 2005, Vol. 20, Gertler, M. and Rogoff, K., eds. Cambridge, MA: MIT Press (2006).Google Scholar
Dickey, D. A., and Fuller, W. A.. “Distribution of the Estimators for Autoregressive Time Series with a Unit Root.” Journal of the American Statistical Association, 74 (1979), 427–431.Google Scholar
Drechsler, I.“Uncertainty, Time-Varying Fear, and Asset Prices.” Working Paper, New York University (2009).Google Scholar
Drechsler, I., and Yaron, A.. “What’s Vol Got to Do With It.” Review of Financial Studies, 24 (2011), 1–45.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Multifactor Explanations of Asset Pricing Anomalies.” Journal of Finance, 51 (1996), 55–84.CrossRefGoogle Scholar
Ferreira, M. A., and Laux, P. A.. “Corporate Governance, Idiosyncratic Risk, and Information Flow.” Journal of Finance, 62 (2007), 951–989.CrossRefGoogle Scholar
Fink, J.; Fink, K. E.; Grullon, G.; and Weston, J. P.. “What Drove the Increase in Idiosyncratic Volatility during the Internet Boom?” Journal of Financial and Quantitative Analysis, 45 (2010), 1253–1278.CrossRefGoogle Scholar
Foucault, T.; Sraer, D.; and Thesmar, D. J.. “Individual Investors and Volatility.” Journal of Finance, 66 (2011), 1369–1406.CrossRefGoogle Scholar
Gaspar, J.-M., and Massa, M.. “Idiosyncratic Volatility and Product Market Competition.” Journal of Business, 79 (2006), 3125–3152.CrossRefGoogle Scholar
Gilchrist, S.; Yankov, V.; and Zakrajsek, E.. “Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets.” Journal of Monetary Economics, 56 (2009), 471–493.CrossRefGoogle Scholar
Guo, H., and Savickas, R.. “Average Idiosyncratic Volatility in G7 Countries.” Review of Financial Studies, 21 (2008), 1259–1296.CrossRefGoogle Scholar
Hamilton, J. D. Time Series Analysis. Princeton, NJ: Princeton University Press (1994).CrossRefGoogle Scholar
Harvey, C. R. “The Real Term Structure and Consumption Growth.” Journal of Financial Economics, 22 (1988), 305–333.CrossRefGoogle Scholar
Hendry, D. F., and Krolzig, H.-M.. Automatic Econometric Model Selection. London: Timberlake Consultants Press (2001).Google Scholar
Henkel, S. J.; Martin, J. S.; and Nardari, F.. “Time-Varying Short-Horizon Return Predictability.” Journal of Financial Economics, 99 (2011), 560–580.CrossRefGoogle Scholar
Irvine, P. J., and Pontiff, J.. “Idiosyncratic Return Volatility, Cash Flows, and Product Market Competition.” Review of Financial Studies, 22 (2009), 1149–1177.CrossRefGoogle Scholar
Jin, L., and Myers, S. C.. “R 2 around the World: New Theory and New Tests.” Journal of Financial Economics, 79 (2006), 257–292.CrossRefGoogle Scholar
Kothari, S. P., and Warner, J. B.. “The Econometrics of Event Studies.” Working Paper, Massachusetts Institute of Technology (2004).CrossRefGoogle Scholar
Longin, F., and Solnik, B.. “Extreme Correlation of International Equity Markets.” Journal of Finance, 56 (2001), 649–676.CrossRefGoogle Scholar
Morck, R.; Yeung, B.; and Yu, W.. “The Information Content of Stock Markets: Why Do Emerging Markets Have Synchronous Stock Price Movements?” Journal of Financial Economics, 58 (2000), 215–260.CrossRefGoogle Scholar
Mueller, P.“Credit Spreads and Real Activity.” Working Paper, London School of Economics (2009).CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Pastor, L., and Veronesi, P.. “Stock Valuation and Learning about Profitability.” Journal of Finance, 58 (2003), 1749–1789.CrossRefGoogle Scholar
Phillips, P. C. B., and Perron, P.. “Testing for a Unit Root in Time Series Regression.” Biometrika, 75 (1988), 335–346.CrossRefGoogle Scholar
Schwert, G. W. “Why Does Stock Market Volatility Change Over Time?” Journal of Finance, 44 (1989), 1115–1153.CrossRefGoogle Scholar
Schwert, G. W. “Stock Volatility and the Crash of ’87.” Review of Financial Studies, 3 (1990), 77–102.CrossRefGoogle Scholar
Vogelsang, T. J. “Trend Function Hypothesis Testing in the Presence of Serial Correlation.” Econometrica, 66 (1998), 123–148.CrossRefGoogle Scholar
Wei, S. X., and Zhang, C.. “Why Did Individual Stocks Become More Volatile?” Journal of Business, 79 (2006), 259–292.CrossRefGoogle Scholar
White, H. “A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity.” Econometrica, 48 (1980), 817–838.CrossRefGoogle Scholar
Xu, Y., and Malkiel, B. G.. “Investigating the Behavior of Idiosyncratic Volatility.” Journal of Business, 76 (2003), 613–644.CrossRefGoogle Scholar
Zhang, C. “A Reexamination of the Causes of Time-Varying Stock Return Volatilities.” Journal of Financial and Quantitative Analysis, 45 (2010), 663–684.CrossRefGoogle Scholar
Supplementary material: PDF

Bekaert supplementary material

Bekaert supplementary material

Download Bekaert supplementary material(PDF)
PDF 290.8 KB