Aggregate Idiosyncratic Volatility

65 Pages Posted: 27 Dec 2010

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

Robert J. Hodrick

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

Xiaoyan Zhang

Tsinghua University - PBC School of Finance

Multiple version iconThere are 3 versions of this paper

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

JEL Classification: C52, G11, G12

Suggested Citation

Bekaert, Geert and Hodrick, Robert J. and Zhang, Xiaoyan, Aggregate Idiosyncratic Volatility (December 2010). CEPR Discussion Paper No. DP8149. Available at SSRN: https://ssrn.com/abstract=1729568

Geert Bekaert (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
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

Tsinghua University - PBC School of Finance

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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