Information in the Idiosyncratic Volatility of Small Firms

Brown, David P.; Ferreira, Miguel A.

doi:10.2139/ssrn.475401

Information in the Idiosyncratic Volatility of Small Firms

AFA 2005 Philadelphia Meetings; EFA 2004 Maastricht Meetings Paper No. 3020

59 Pages Posted: 13 Dec 2004

See all articles by David P. Brown

David P. Brown

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Miguel A. Ferreira

Nova School of Business and Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Date Written: September 2004

Abstract

Non-systematic volatilities of small firms are special as predictors of stock returns. They are positively related with future returns on all age and size portfolios. They dominate systematic volatility, big-firm volatility and other volatilities. And there is strong evidence that idiosyncratic risk is priced in small-firm returns. Small-firm volatility as a predictor of big-firm returns is in part a proxy for systematic volatility and consumption-wealth ratio. We rule out several hypotheses, including a liquidity premium, as potential explanations of our results, but not the idea that small-firm idiosyncratic volatility is correlated with the risk of the total investor portfolio, which includes non-equity assets.

Keywords: Idiosyncratic Risk, Systematic Risk, Small Firms

JEL Classification: G12, G14

Suggested Citation: Suggested Citation

Brown, David P. and Ferreira, Miguel Almeida, Information in the Idiosyncratic Volatility of Small Firms (September 2004). AFA 2005 Philadelphia Meetings; EFA 2004 Maastricht Meetings Paper No. 3020. Available at SSRN: https://ssrn.com/abstract=475401 or http://dx.doi.org/10.2139/ssrn.475401