Investigating the Behavior of Idiosyncratic Volatility

Abstract:     
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.

Keywords: Earning growth, Factor model, Idiosyncratic volatility, Institutional ownership

JEL Classification: G0, M4

Accepted Paper Series