The Idiosyncratic Volatility Puzzle: Time Trend or Speculative Episodes?
57 Pages Posted: 9 Jun 2008 Last revised: 18 Jan 2009
Date Written: June 3, 2008
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: Suggested Citation