What drives idiosyncratic volatility over time?
- First Online:
- 129 Downloads
We document the patterns of market-wide and firm-specific volatility in the Portuguese stock market over the 1991–2005 period and test several explanations for the behavior of firm-level idiosyncratic volatility. Unlike previous studies we find no evidence of a statistically significant rise in firm-specific volatility. On the contrary, the ratio of firm-specific risk to total risk slightly decreases. We show that this result stems from new listings of large privatized companies that display lower firm-specific risk. Our findings are consistent with the idea that changes in idiosyncratic volatility are related to changes in the composition of the market.
KeywordsIdiosyncratic volatility Firm-specific risk Volatility components
- Bekaert G, Hodrick RJ, Zhang X (2008) Is there a trend in idiosyncratic volatility? SSRN, New York, Working paper 1108170Google Scholar
- Brandt M, Brav A, Graham J, Kumar A (2008) The idiosyncratic volatility puzzle: time trend or speculative periods? SSRN, New York, Working paper 1141219Google Scholar
- Comin D, Philippon T (2005) The rise in firm-level volatility: causes and consequences. NBER, Cambridge, Working paper 11388Google Scholar
- Cooper D, Woglom G (2002) The S&P500 effect: not such good news. FEDS, New York, Working paper 48Google Scholar
- Dickey D, Fuller W (1979) Distribution of the estimators for autoregressive time series with a unit root. J Am Stat Assoc 74:427–431Google Scholar
- Kearney C, Potì V (2004) Idiosyncratic risk, market risk and correlation dynamics in European equity markets. Institute for International Integration Studies, Dublin, Working PapersGoogle Scholar