Aggregate Idiosyncratic Volatility

75 Pages Posted: 7 Jun 2010 Last revised: 19 May 2023

See all articles by Geert Bekaert

Geert Bekaert

Columbia University - Columbia Business School, Finance

Robert J. Hodrick

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

Xiaoyan Zhang

Tsinghua University - PBC School of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: June 2010

Abstract

We examine aggregate idiosyncratic volatility in 23 developed equity markets, measured using various methodologies, and we find no evidence of upward trends when we extend the sample until 2008. Instead, idiosyncratic volatility appears to be well described by a stationary autoregressive process that occasionally switches into a higher-variance regime that has relatively short duration. We also document that idiosyncratic volatility is highly correlated across countries. Finally, we examine the determinants of the time-variation in idiosyncratic volatility. In most specifications, the bulk of idiosyncratic volatility can be explained by a growth opportunity proxy, total (U.S.) market volatility, and in most but not all specifications, the variance premium, a business cycle sensitive risk indicator.

Suggested Citation

Bekaert, Geert and Hodrick, Robert J. and Zhang, Xiaoyan, Aggregate Idiosyncratic Volatility (June 2010). NBER Working Paper No. w16058, Available at SSRN: https://ssrn.com/abstract=1620775

Geert Bekaert (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

NY
United States

Robert J. Hodrick

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
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National Bureau of Economic Research (NBER)

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New York, NY 10016-4309
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Xiaoyan Zhang

Tsinghua University - PBC School of Finance ( email )

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Haidian District
Beijing 100083
China

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