Aggregate Idiosyncratic Volatility

63 Pages Posted: 25 Mar 2008 Last revised: 28 Jun 2011

Geert Bekaert

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Robert J. Hodrick

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Xiaoyan Zhang

Purdue University - Krannert School of Management

Multiple version iconThere are 3 versions of this paper

Date Written: July 30, 2010

Abstract

We examine aggregate idiosyncratic volatility in 23 developed equity markets, measured using various methodologies, and we find no evidence of upward trends when we extend the sample till 2008. 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 (U.S.) 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.

Keywords: idiosyncratic volatility, trend test, regime switching model, diversification, return correlation, volatility dynamics, growth opportunities, variance premium, contagion

JEL Classification: C52, G11, G12

Suggested Citation

Bekaert, Geert and Hodrick, Robert J. and Zhang, Xiaoyan, Aggregate Idiosyncratic Volatility (July 30, 2010). AFA 2009 San Francisco Meetings Paper; EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1108170 or http://dx.doi.org/10.2139/ssrn.1108170

Geert Bekaert

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert J. Hodrick

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

365 Fifth Avenue, 5th Floor
New York, NY 10016-4309
United States

Xiaoyan Zhang (Contact Author)

Purdue University - Krannert School of Management ( email )

403 WEST STATE STREET
West Lafayette, IN 47907-1310
United States
7654967674 (Phone)

HOME PAGE: http://web.ics.purdue.edu/~zhang654/

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