Why is There a Secular Decline in Idiosyncratic Risk in the 2000s?
Charles A. Dice Center Working Paper No. 2019-19
47 Pages Posted: 12 Sep 2019
Date Written: September 9, 2019
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: Suggested Citation