The Idiosyncratic Volatility Puzzle: Time Trend or Speculative Episodes?

57 Pages Posted: 9 Jun 2008 Last revised: 18 Jan 2009

See all articles by Michael W. Brandt

Michael W. Brandt

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Alon Brav

Duke University - Fuqua School of Business; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Alok Kumar

University of Miami - Miami Herbert Business School

Multiple version iconThere are 2 versions of this paper

Date Written: June 3, 2008

Abstract

Campbell, Lettau, Malkiel, and Xu (2001) document a positive trend in idiosyncratic volatility during the 1962 to 1997 period. We show that this trend completely reverses itself by 2007, falling below pre-1990s levels. Furthermore, we show that the reversal is concentrated among firms with low stock prices and high retail ownership. This evidence suggests that the increase in idiosyncratic volatility through the 1990s was not a time trend but, rather, an episodic phenomenon, at least partially associated with retail investors. Results from cross-sectional regressions, conditional trend estimation, stock-split events, and attention-grabbing events are consistent with a retail trading effect.

Keywords: Idiosyncratic volatility, stock market bubbles, retail investors, speculation, stock splits

JEL Classification: G11, G12, G14

Suggested Citation

Brandt, Michael W. and Brav, Alon and Graham, John Robert and Kumar, Alok, The Idiosyncratic Volatility Puzzle: Time Trend or Speculative Episodes? (June 3, 2008). McCombs Research Paper Series No. FIN-02-09, Available at SSRN: https://ssrn.com/abstract=1141219 or http://dx.doi.org/10.2139/ssrn.1141219

Michael W. Brandt

Duke University - Fuqua School of Business ( email )

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National Bureau of Economic Research (NBER)

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Alon Brav

Duke University - Fuqua School of Business ( email )

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European Corporate Governance Institute (ECGI) ( email )

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John Robert Graham

Duke University ( email )

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919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

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Alok Kumar (Contact Author)

University of Miami - Miami Herbert Business School ( email )

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Department of Finance
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United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

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