The International Commonality of Idiosyncratic Variances

75 Pages Posted: 11 Jan 2019 Last revised: 20 May 2019

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)

Xue Wang

Nankai University - School of Finance

Xiaoyan Zhang

Tsinghua University - PBC School of Finance

Date Written: May 2019

Abstract

We establish several facts about the aggregate idiosyncratic variances of equity markets in 23 countries. First, we document strong global commonality in aggregate idiosyncratic variances of returns and cash flows across countries. Second, the global and country level common factors of the idiosyncratic return and cash flow variances are mostly but not always countercyclical. Third, the time series variation of these common factors in idiosyncratic variances of returns and cash flows are highly correlated. Global aggregate idiosyncratic return variances are also significantly related to variables capturing aggregate discount rate variation, and growth opportunities. These stylized facts are mostly inconsistent with extant theories regarding the time variation in idiosyncratic return variances.

Keywords: return idiosyncratic variance, cash flow idiosyncratic variance, global commonality, countercyclical, state variables

JEL Classification: F39, G12, G15

Suggested Citation

Bekaert, Geert and Hodrick, Robert J. and Wang, Xue and Zhang, Xiaoyan, The International Commonality of Idiosyncratic Variances (May 2019). Available at SSRN: https://ssrn.com/abstract=3308987 or http://dx.doi.org/10.2139/ssrn.3308987

Geert Bekaert

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

Xue Wang

Nankai University - School of Finance ( email )

38 Tongyan Road, Jinnan District
Tianjin, Tianjin 300350
China

Xiaoyan Zhang (Contact Author)

Tsinghua University - PBC School of Finance

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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