The International Commonality of Idiosyncratic Variances
75 Pages Posted: 11 Jan 2019
Date Written: December 29, 2018
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: Suggested Citation