Idiosyncratic Return Volatility, Cash Flows, and Product Market Competition

53 Pages Posted: 16 Mar 2005

See all articles by Paul J. Irvine

Paul J. Irvine

Neeley School of Business

Jeffrey Pontiff

Boston College - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 2005

Abstract

Over the past forty years, the volatility of the average stock return has drastically outpaced total market volatility. Thus, idiosyncratic return volatility has dramatically increased. We estimate this increase to be 6% per year. Consistent with an efficient market, we show that this result is mirrored by an increase in the idiosyncratic volatility of fundamental cash flows. We argue that these findings are attributable to more intense economy-wide competition. Various cross-sectional and time-series tests support this idea. Economic competitiveness facilitates reinterpretation of the results from previous studies.

Keywords: Idiosyncratic volatility, cash flows, competition

JEL Classification: G11, G13

Suggested Citation

Irvine, Paul J. and Pontiff, Jeffrey, Idiosyncratic Return Volatility, Cash Flows, and Product Market Competition (March 2005). Available at SSRN: https://ssrn.com/abstract=685645 or http://dx.doi.org/10.2139/ssrn.685645

Paul J. Irvine

Neeley School of Business ( email )

Fort Worth, TX 76129
United States

Jeffrey Pontiff (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

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