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Does idiosyncratic volatility matter at the global level?

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  • Umutlu, Mehmet

Abstract

I test the existence of a time-series relationship between the aggregate idiosyncratic volatility and the market index return at the global level by introducing various global measures of aggregate idiosyncratic volatility. I offer four definitions of aggregate global idiosyncratic volatility (GIVOL) based on factor models and two other definitions, which are free from factor models. Regardless of whether I use model-dependent or model-independent measures, I find no evidence of a robust and significant relation between the aggregate GIVOL and the global market return. This result is valid for four different sub-periods and four different subsamples reflecting the different states of the economy and the stock market. It is also robust to the inclusion of several control variables. As global idiosyncratic volatility is not a priced factor in the intertemporal asset pricing framework, the results indicate that international diversification is still effective in eliminating idiosyncratic volatility despite the globalization process.

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  • Umutlu, Mehmet, 2019. "Does idiosyncratic volatility matter at the global level?," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 252-268.
    • Handle: RePEc:eee:ecofin:v:47:y:2019:i:c:p:252-268
    DOI: 10.1016/j.najef.2018.12.015
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    5. Zaremba, Adam & Cakici, Nusret & Demir, Ender & Long, Huaigang, 2022. "When bad news is good news: Geopolitical risk and the cross-section of emerging market stock returns," Journal of Financial Stability, Elsevier, vol. 58(C).
    6. Adam Zaremba, 2019. "The Cross Section of Country Equity Returns: A Review of Empirical Literature," JRFM, MDPI, vol. 12(4), pages 1-26, October.
    7. Umutlu, Mehmet & Bengitöz, Pelin, 2020. "The cross-section of industry equity returns and global tactical asset allocation across regions and industries," International Review of Financial Analysis, Elsevier, vol. 72(C).
    8. Zaremba, Adam & Long, Huaigang & Karathanasopoulos, Andreas, 2019. "Short-term momentum (almost) everywhere," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 63(C).
    9. Yi-Shu Wang & Ting-Chen & Zhen-Jia-Liu, 2020. "The Relationship between Accounting Information Quality and Idiosyncratic Volatility: An Empirical Study on Chinese A-Share Listed Companies," Eurasian Journal of Business and Management, Eurasian Publications, vol. 8(2), pages 150-166.
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    More about this item

    Keywords

    Global idiosyncratic volatility; Aggregate idiosyncratic volatility; World market return; International diversification;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F30 - International Economics - - International Finance - - - General

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