The Volatility Factor Structure
Bryan T. Kelly
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
Hanno N. Lustig
UCLA - Anderson School of Management; National Bureau of Economic Research (NBER)
Stijn Van Nieuwerburgh
New York University Stern School of Business, Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
November 1, 2012
Chicago Booth Research Paper No. 12-54
Fama-Miller Working Paper
Firm-level volatility obeys a strong factor structure. The factor structure is distinct from the common variation in the returns themselves - after removing common factors in returns, residuals are uncorrelated, yet idiosyncratic volatility possess the same factor structure as total volatility. In fact, idiosyncratic volatility dominates firms' total variation - less that 5% of variation in daily returns is accounted for by common factors. The volatility factor structure holds not only for returns, but also for firm-level cash flow growth volatility. Thus any explanation of the volatility factor structure must account for both fundamental and return volatility, ruling out arguments based purely on discount rates or investor behavior.
Number of Pages in PDF File: 24working papers series
Date posted: November 12, 2012
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