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Author: Kiseok Nam
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
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Book Description
We suggest that price interaction among stocks is an important determinant of idiosyncratic volatility. We demonstrate that as more (less) stocks are listed in the markets, price interaction among stocks increases (decreases), and hence stocks, on average, become more (less) volatile. Our results show that price interaction has a significant positive effect of idiosyncratic volatility. The results of various robustness checks indicate that the effect of price interaction is still significant to the presence of liquidity, newly listed firms, cash flow variables, business cycle variables, and market volatility. Once the price interaction effect is taken into account, no trend remains in idiosyncratic volatility. We conclude that there is no trend, but a reflection of the positive effect of price interaction on idiosyncratic volatility.
Author: Kiseok Nam
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
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Book Description
We suggest that price interaction among stocks is an important determinant of idiosyncratic volatility. We demonstrate that as more (less) stocks are listed in the markets, price interaction among stocks increases (decreases), and hence stocks, on average, become more (less) volatile. Our results show that price interaction has a significant positive effect of idiosyncratic volatility. The results of various robustness checks indicate that the effect of price interaction is still significant to the presence of liquidity, newly listed firms, cash flow variables, business cycle variables, and market volatility. Once the price interaction effect is taken into account, no trend remains in idiosyncratic volatility. We conclude that there is no trend, but a reflection of the positive effect of price interaction on idiosyncratic volatility.
Author: Geert Bekaert
Publisher:
ISBN:
Category : Economics
Languages : en
Pages : 62
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Book Description
We examine aggregate idiosyncratic volatility in 23 developed equity markets, measured using various methodologies, and we find no evidence of upward trends. Instead, idiosyncratic volatility appears to be 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. Finally, we examine the determinants of the time-variation in idiosyncratic volatility. In most specifications, the bulk of idiosyncratic volatility can be explained by a growth opportunity proxy, total (US) market volatility, and in most but not all specifications, the variance premium, a business cycle sensitive risk indicator. Our results have important implications for studies of portfolio diversification, return volatility and contagion.
Author: René Garcia
Publisher:
ISBN:
Category : Business enterprises
Languages : en
Pages : 0
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Book Description
Author: Yexiao Xu
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
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Book Description
This paper studies the behavior of idiosyncratic volatility for the post war period. Using aggregate idiosyncratic volatility statistics constructed from the Fama and French (1993) three-factor model, we find that the volatility of individual stocks appears to have increased over time. This trend is not solely attributed to the increasing prominence of the NASDAQ market. We go on to suggest that the idiosyncratic volatility of individual stocks is associated with the degree to which their shares are owned by financial institutions. Finally, we show that idiosyncratic volatility is also positively related to expected earning growth.
Author: David A. Lesmond
Publisher:
ISBN:
Category :
Languages : en
Pages : 61
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Book Description
This paper models a market microstructure bias, driven by the bid-ask spread, that is evident in the pricing of aggregate firm-level risk embodied by the stock return variance estimates of Goyal and Santa-Clara (2003). Controlling for this bias, we find no pricing ability for aggregate firm-level variance for the period 1927 to 2012 or for any sub-period tested. Market microstructure also explains the time-trend of aggregate firm-level volatility observed from 1962 to 1997 (Campbell, Lettau, Malkiel, and Xu, 2001), and subsumes any relation between retail trading and future idiosyncratic volatility from 1983 to 1999 (Brandt, Brav, Graham, and Kumar, 2010). We conclude that the aggregate firm-level bid-ask spread is priced with future market returns rather than any of the aggregate firm-level risk measures.
Author: Paul Brockman
Publisher:
ISBN:
Category :
Languages : en
Pages : 46
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Book Description
Recent research on idiosyncratic volatility has documented three main empirical findings. First, Campbell, Lettau, Malkiel, and Xu (2001) show that idiosyncratic volatility exhibits an upward trend between 1962 and 1997. Second, Goyal and Santa-Clara (2003) find that aggregate measures of idiosyncratic volatility predict one-month-ahead excess market returns from 1962 to 1999. Third, Ang, Hodrick, Xing, and Zhang (2006) report a negative and significant relation between idiosyncratic volatility and cross-sectional stock returns from 1963 to 2000. We re-examine these three findings using a 37-year holdout sample of daily returns from 1926 to 1962. We find robust empirical evidence of (1) a statistically significant downward trend in idiosyncratic volatility, (2) an insignificant relation between average idiosyncratic volatility and one-month-ahead excess market returns, and (3) a highly significant inverse relation between idiosyncratic volatility and cross-sectional stock returns. These results shed new light on the time-series behavior and pricing of idiosyncratic volatility.
Author: Hui Guo
Publisher:
ISBN:
Category : Stocks
Languages : en
Pages : 41
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Book Description
Author: Turan G. Bali
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
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Book Description
This paper introduces a model-independent measure of aggregate idiosyncratic risk based on the mean-variance portfolio theory and the concept of gain from portfolio diversification. With the new approach, there is no need to estimate the covariance terms or the industry-level or firm-level beta coefficients when constructing the average idiosyncratic risk at the industry- or firm-level. Since there is no gain from diversification when the correlations among individual stocks equal one, the variance of the portfolio with perfectly correlated securities contains systematic risk and idiosyncratic risk of the securities in the portfolio. We also think that the stock market index can be viewed as a fully diversified portfolio, which does not contain any idiosyncratic risk. Since the market portfolio contains a large number of stocks, enough diversification gains are achieved and the idiosyncratic risk contributes nothing to the total risk of the market portfolio. That is, the risk of this well-diversified portfolio is due solely to the systematic risk of the securities in the portfolio. The new measure of average idiosyncratic volatility is defined as the difference between the variance of the non-diversified portfolio and the variance of the fully diversified portfolio. We present two versions of the new methodology; one decomposing total risk into firm and market variance, and the other decomposing total risk into firm, industry, and market variance. The statistical results and graphical analyses provide strong evidence that there are significant level and trend differences between the average idiosyncratic volatility measures of Campbell, Lettau, Malkiel, and Xu (2001, CLMX) and the new methodology. Although both approaches indicate a noticeable increase in the firm-level idiosyncratic risk, the volatility measure of CLMX is greater and has a stronger upward trend than the new idiosyncratic volatility measure. The analytical and empirical results show that the significant upward trend in the differences of the two idiosyncratic volatility measures is related to the increase in the cross-sectional dispersion of the volatility of individual stocks.
Author: Zhentao Liu
Publisher:
ISBN:
Category :
Languages : en
Pages : 28
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Book Description
Purpose: The current research is to investigate the time series behavior of idiosyncratic volatility (IVOL) and its role in asset pricing in France in a twenty-year testing period. Design/methodology/approach: We test for the presence of trends in aggregate idiosyncratic and market volatility using Bunzel and Vogelsang's (2005) t-dan test. We follow Bekaert et al. (2012) to test for regime shifts of both aggregate idiosyncratic and market volatilities. And then, we employ portfolio level analysis and cross-sectional univariate Fama-MacBeth regressions to examine the relationship between IVOL and cross-sectional stock returns in French stock market.Findings: First, we find that both idiosyncratic and market volatility do not exhibit long-term trends. Instead, their patterns are consistent with regime switching behavior. Second, though we initially find a strong significant negative IVOL effect in the French stock market which is robust in bi-variate Fama-MacBeth regressions, the negative IVOL effect is becoming marginal significant when we control for SIZE, BM, momentum, and short-term reversal simultaneously. Our new evidence suggests that there is a marginal IVOL effect in the French stock market adding to the increasing number of studies questioning the ubiquity of the negative IVOL puzzle.Originality/value: First, we present the first empirical evidence on examining the trends of both aggregate idiosyncratic and market volatilities, and the pricing role of IVOL in French stock market. We draw an attention for both academia and practitioners on an individual developed stock market. Second, we add new evidence to the mounting results questioning the ubiquity of the IVOL effect. This highlights the importance of country verification of so called anomalies in the US, even in developed markets. Finally, we confirm earlier evidence both aggregate idiosyncratic and market volatilities in the French stock market exhibits regime switching behavior rather than showing a long-term time trends.
Author: Charles Cao
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
While recent studies document increasing idiosyncratic volatility over the past four decades, an explanation for this trend remains elusive. We establish a theoretic link between growth options available to managers and the idiosyncratic risk of equity. Empirically both the level and variance of corporate growth options are significantly related to idiosyncratic volatility. Accounting for growth options eliminates or reverses the trend in aggregate firm specific risk. These results are robust for different measures of idiosyncratic volatility, different growth option proxies, across exchanges, and through time. Finally, our results suggest that growth options explain the trend in idiosyncratic volatility beyond alternative explanations.
