An Analysis of Firm and Market Volatility

Abstract

In this paper, using time series data for the period 2 January to1998 to 31 December 2008, for 560 firms listed on the NYSE, we examine whether firm volatility is related to market volatility. The main contribution of this paper is that we develop the analytical framework motivating the firm-market volatility relationship. We unravel three new findings on volatility. First, we discover significant evidence of common volatility; for 12 out 14 sectors, market volatility has a statistically significant effect on firm volatility for at least 50 percent of firms. Second, we discover significant evidence of size effects; for small sized firms, there is weak evidence of commonality in volatility, while for large sized firms there is high evidence (as much as 75 percent of firms) of commonality in volatility. Third, we find that market volatility predicts firms volatility for firms belonging to five of the 14 sectors.

Keywords: Volatility, Size Effects, Firms, Market