The International Commonality of Idiosyncratic Variances
68 Pages Posted: 11 Jan 2019 Last revised: 29 Oct 2020
Date Written: May 1, 2019
We document strong global commonality in firm-level and aggregate idiosyncratic return variances across 23 developed markets, and develop a rational pricing model to explain the empirical pattern. We find that the global common factor of idiosyncratic return variances is highly correlated with that of idiosyncratic cash flow variances, and is also significantly related to variables capturing aggregate discount rate variation and growth opportunities. We further document that the aggregate idiosyncratic return and cash flow variances are mostly but not always countercyclical. These findings 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