Idiosyncratic Return Volatility, Cash Flows, and Product Market Competition
Paul J. Irvine
University of Georgia - Department of Banking and Finance
Boston College - Department of Finance
The Review of Financial Studies, Vol. 22, Issue 3, pp. 1149-1177, 2009
Over the past 40 years, the volatility of the average stock return has drastically outpaced total market volatility. Thus, idiosyncratic return volatility has dramatically increased. We estimate this increase to be 6% per year. Consistent with an efficient market, this result is mirrored by an increase in the idiosyncratic volatility of fundamental cash flows. We argue that these findings are attributable to the more intense economy-wide competition. Various cross-sectional and time-series tests support this idea. Economic competitiveness facilitates reinterpretation of the results from the cross-country R2 literature, as well as the US idiosyncratic risk literature.
Keywords: G12, G14Accepted Paper Series
Date posted: March 17, 2009
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