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Aggregate Idiosyncratic Volatility

Part of:JFQA William F. Sharpe Best Paper Award Winner

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
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Abstract

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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.

Information

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

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