Why is There a Secular Decline in Idiosyncratic Risk in the 2000s?

Fisher College of Business Working Paper No. 2019-03-019

Charles A. Dice Center Working Paper No. 2019-19

47 Pages Posted: 12 Sep 2019

See all articles by Söhnke M. Bartram

Söhnke M. Bartram

Warwick Business School - Department of Finance

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: September 9, 2019

Abstract

Except for relatively short but intense episodes of high market risk, average idiosyncratic risk (IR) falls steadily after 2000 until almost the end of our sample period in 2017. The decrease has been such that from 2012 to 2017 average IR was lower than any time since 1965. The secular decline can be explained by the fact that U.S. publicly listed firms have become larger, older, and their stock more liquid. The same changes that bring about historically low IR lead to increasingly high market-model R-squareds.

Keywords: idiosyncratic risk, market risk, liquidity, firm age, public listing decline

JEL Classification: G10, G11, G12

Suggested Citation

Bartram, Söhnke M. and Brown, Gregory W. and Stulz, Rene M., Why is There a Secular Decline in Idiosyncratic Risk in the 2000s? (September 9, 2019). Charles A. Dice Center Working Paper No. 2019-19. Available at SSRN: https://ssrn.com/abstract=3450845 or http://dx.doi.org/10.2139/ssrn.3450845

Söhnke M. Bartram

Warwick Business School - Department of Finance ( email )

Coventry, CV4 7AL
United Kingdom
+44 (24) 7657 4168 (Phone)
+1 425 952 1070 (Fax)

HOME PAGE: http://go.warwick.ac.uk/sbartram/

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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