Average Idiosyncratic Volatility in G7 Countries

FRB of St. Louis Working Paper No. 2004-027C

62 Pages Posted: 8 Nov 2004

See all articles by Hui Guo

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Robert Savickas

George Washington University - School of Business - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 2007

Abstract

We argue that changes in average idiosyncratic volatility provide a proxy for changes in the investment opportunity set, and this proxy is closely related to the book-to-market factor. We test this idea in two ways using G7 countries' data. First, we show that idiosyncratic volatility has statistically significant predictive power for aggregate stock market returns over time. Second, we show that idiosyncratic volatility performs just as well as the book-to-market factor in explaining the cross section of stock returns. Our results suggest that the hedge against changes in investment opportunities is an important determinant of asset prices.

Keywords: Idiosyncratic Volatility, Stock Market Volatility, Value Premium, Stock Return Predictability, ICAPM, Unit Root, Deterministic Trend, Granger Causality

JEL Classification: G1

Suggested Citation

Guo, Hui and Savickas, Robert, Average Idiosyncratic Volatility in G7 Countries (January 2007). FRB of St. Louis Working Paper No. 2004-027C, Available at SSRN: https://ssrn.com/abstract=615242 or http://dx.doi.org/10.2139/ssrn.615242

Hui Guo

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
418 Carl H. Lindner Hall
Cincinnati, OH 45221
United States
513.556.7077 (Phone)
513.556.0979 (Fax)

HOME PAGE: http://homepages.uc.edu/~guohu/

Robert Savickas (Contact Author)

George Washington University - School of Business - Department of Finance ( email )

Funger Hall, Suite 501R
2201 G Street, N.W.
Washington, DC 20052
United States
202-994-8936 (Phone)
202-994-5014 (Fax)

HOME PAGE: http://savickas.net/

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