Fundamental and Information Uncertainties, Business Cycle, and Idiosyncratic Stock Volatility

Posted: 18 Apr 2015

See all articles by Ahsan Habib

Ahsan Habib

Massey University - School of Accountancy; Massey University

Adrian (Wai-kong) Cheung

Flinders University

Mostafa Monzur Hasan

Macquarie University

Date Written: April 16, 2015


This paper examines empirically the effect of business cycle on fundamental and information uncertainties and whether this relationship accentuates or attenuates idiosyncratic stock volatility. Fundamental uncertainty refers to the uncertainty about firms’ future cash flows and earnings, while information uncertainty captures the uncertainty about the true economic performance of the firm due to financial reporting imprecision and inaccuracy. This paper argues that on the one hand a positive relation between firm-level fundamental uncertainty and economic recession is expected because of unpredictability of earnings and cash flows of the firm during recession. On the other hand, information uncertainty is expected to be lower during recession because regulators and investors focus more on downside risk and require conservative reporting by management. The empirical evidence is largely consistent with these predictions. The paper further documents that idiosyncratic stock volatility increases (reduces) with fundamental (information) uncertainty during both recession and expansion, but the effect is much more pronounced during economic recession than economic expansion.

Keywords: Business cycle; fundamental uncertainty; information uncertainty; idiosyncratic return volatility

JEL Classification: E32, D82, G32

Suggested Citation

Habib, Ahsan and Cheung, Adrian and Hasan, Mostafa Monzur, Fundamental and Information Uncertainties, Business Cycle, and Idiosyncratic Stock Volatility (April 16, 2015). Available at SSRN:

Ahsan Habib (Contact Author)

Massey University - School of Accountancy ( email )

New Zealand

Massey University ( email )

New Zealand

Adrian Cheung

Flinders University ( email )

GPO Box 2100
Adelaide S.A. 5001, SA 5063
+618 8201 5831 (Phone)

Mostafa Monzur Hasan

Macquarie University ( email )

Level 3, Building 4ER,
Sydney, NSW 2109

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