Idiosyncratic Volatility and Product Market Competition

29 Pages Posted: 8 Apr 2005

Date Written: December 2004

Abstract

This Paper investigates the link between a firm's competitive environment and the idiosyncratic volatility of its stock returns. We find that firms enjoying high market power, or established in concentrated industries, have lower idiosyncratic volatility. We posit that competition affects volatility in two distinct and inter-related ways. Market power works as a hedging instrument that smoothes out idiosyncratic fluctuations. At the same time, a high degree of market power implies lower information uncertainty for investors and, therefore, lower return volatility. We find strong support for both effects. Our results contribute to the understanding of recent trends of idiosyncratic volatility, and confirm the important link between stock market performance and the competitive environment of firms.

Keywords: Idiosyncratic volatility, competition, market powers, uncertainty

JEL Classification: G10, G12, L11

Suggested Citation

Gaspar, Jose-Miguel and Massa, Massimo, Idiosyncratic Volatility and Product Market Competition (December 2004). CEPR Discussion Paper No. 4812. Available at SSRN: https://ssrn.com/abstract=700645

Jose-Miguel Gaspar (Contact Author)

ESSEC Business School ( email )

Avenue Bernard Hirsch
Cergy-Pontoise, 95021
France
+33 1 3443 3374 (Phone)
+33 1 3443 3212 (Fax)

HOME PAGE: http://www.essec.edu

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

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