Aggregate Idiosyncratic Volatility
Coauthor(s): Geert Bekaert, Xiaoyan Zhang.
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We examine aggregate idiosyncratic volatility in 23 developed equity markets, measured using various methodologies, and we find no evidence of upward trends. 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 (US) market volatility, and in most but not all specifications, the variance premium, a business cycle sensitive risk indicator. Our results have important implications for studies of portfolio diversification, return volatility and contagion.
Source: Journal of Financial and Quantitative Analysis
Bekaert, Geert, Robert Hodrick, and Xiaoyan Zhang. "Aggregate Idiosyncratic Volatility." Journal of Financial and Quantitative Analysis 47, no. 6 (2012): 1155-1185.