The Idiosyncratic Volatility Puzzle: Time Trend or Speculative Episodes?

Posted: 1 Feb 2010

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: December 2009

Abstract

Campbell, Lettau, Malkiel, and Xu (2001) document a positive trend in idiosyncratic volatility during the 1962-1997 period. We show that by 2003 volatility falls back to pre-1990s levels. Furthermore, we show that the increase and subsequent 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: 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? (December 2009). The Review of Financial Studies, Vol. 23, Issue 2, pp. 863-899, 2009, Available at SSRN: https://ssrn.com/abstract=1544187 or http://dx.doi.org/10.1093/rfs/hhp087

Michael W. Brandt (Contact Author)

Duke University - Fuqua School of Business ( email )

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Alon Brav

Duke University - Fuqua School of Business ( email )

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John Robert Graham

Duke University ( email )

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National Bureau of Economic Research (NBER)

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Alok Kumar

University of Miami - Miami Herbert Business School ( email )

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

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