Has Idiosyncratic Volatility Increased? Not in Recent Times

Critical Finance Review, Forthcoming

58 Pages Posted: 13 Nov 2020

See all articles by Mardy Chiah

Mardy Chiah

Swinburne University of Technology

Philip Gharghori

Monash University

Angel Zhong

RMIT University - School of Economics, Finance and Marketing

Date Written: September 26, 2020

Abstract

This study successfully replicates the key findings of Campbell, Lettau, Malkiel, and Xu (2001). We document that aggregate idiosyncratic volatility increases over their sample period from 1962 to 1997. In out-of-sample analysis from 1926 to 1962 and 1998 to 2017, we find that idiosyncratic volatility (IV) decreases, suggesting that their finding is sample-specific. We compare their measure of IV with those obtained from models such as the Fama and French (1993) three-factor model and find that they are very similar. The Campbell et al. (2001) volatility measures can only be estimated at the aggregate level. An advantage of asset pricing model-based IVs is that they can be estimated at the stock level. Employing these stock-level IV measures, we examine trends in a variety of IV series and how IV relates to commonly analyzed firm characteristics. In doing so, we provide further insight into IV and its time-series trends.

Keywords: idiosyncratic volatility, market volatility, asset pricing

JEL Classification: G12

Suggested Citation

Chiah, Mardy and Gharghori, Philip and Zhong, Angel, Has Idiosyncratic Volatility Increased? Not in Recent Times (September 26, 2020). Critical Finance Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3672869 or http://dx.doi.org/10.2139/ssrn.3672869

Mardy Chiah

Swinburne University of Technology ( email )

Cnr Wakefield and William Streets, Hawthorn Victor
3122 Victoria, Victoria 3122
Australia

Philip Gharghori (Contact Author)

Monash University ( email )

Wellington Road
Melbourne, 3800
Australia
+61399059247 (Phone)

HOME PAGE: http://research.monash.edu/en/persons/philip-gharghori

Angel Zhong

RMIT University - School of Economics, Finance and Marketing ( email )

Level 12, 239 Bourke Street
Melbourne, Victoria 3000
Australia

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