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Global investigation on the country-level idiosyncratic volatility and its determinants

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  • Caglayan, Mustafa Onur
  • Xue, Wenjun
  • Zhang, Liwen

Abstract

Adapting the Fama–French three-factor model to a global context, this paper investigates idiosyncratic volatility as a measure of country-specific risk, and explores its determinants by using the equity and risk data of 47 developed and emerging countries during the period 1995–2016. We find the stock market turnover to have a positive and significant impact on the country-level idiosyncratic volatility, while information disclosure and investor uncertainty avoidance degree are negatively associated with country-level idiosyncratic risk. Moreover, improvements in economic, financial, and political risks, as measured by GDP growth, FX stability, foreign debt health, and non-corruption degree decrease the country-level idiosyncratic volatility significantly. Among all sets of market structure, investor preference, and economic, financial, and political risk variables considered, we find financial risk factors, FX stability and foreign debt health, to have the highest explanatory power over the cross-sectional differences in country-level idiosyncratic risk.

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  • Caglayan, Mustafa Onur & Xue, Wenjun & Zhang, Liwen, 2020. "Global investigation on the country-level idiosyncratic volatility and its determinants," Journal of Empirical Finance, Elsevier, vol. 55(C), pages 143-160.
    • Handle: RePEc:eee:empfin:v:55:y:2020:i:c:p:143-160
    DOI: 10.1016/j.jempfin.2019.11.006
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    More about this item

    Keywords

    Idiosyncratic volatility; Country Risk; Quantile GARCH model;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General

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