IDEAS home Printed from https://ideas.repec.org/a/now/jnlcfr/104.00000128.html
   My bibliography  Save this article

Idiosyncratic Equity Risk Two Decades Later

Author

Listed:
  • John Y. Campbell
  • Martin Lettau
  • Burton Malkiel
  • Yexiao Xu

Abstract

This paper reviews the literature on idiosyncratic equity volatility since the publication of “Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk†in 2001. We respond to replication studies by Chiah, Gharghori, and Zhong and by Leippold and Svaton, and we present volatility estimates through the end of 2021, significantly extending the period covered in our original paper as well as the two replication studies. After spiking in the 1999 to 2000 period, idiosyncratic volatility declined thereafter; but sharp increases in market, industry, and idiosyncratic volatility occurred during the global financial crisis of 2008 to 2009 and the COVID-19 pandemic of 2020 to 2021. We argue that market microstructure effects are not of first-order importance for volatility measurement, and we discuss the roles of fundamental factors and investor sentiment in driving the observed fluctuations in volatility.

Suggested Citation

  • John Y. Campbell & Martin Lettau & Burton Malkiel & Yexiao Xu, 2023. "Idiosyncratic Equity Risk Two Decades Later," Critical Finance Review, now publishers, vol. 12(1-4), pages 203-223, August.
    • Handle: RePEc:now:jnlcfr:104.00000128
    DOI: 10.1561/104.00000128
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1561/104.00000128
    Download Restriction: no
    File URL: https://libkey.io/10.1561/104.00000128?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. John Y. Campbell & Martin Lettau & Burton G. Malkiel & Yexiao Xu, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, February.
    2. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-179, March.
    3. John Y. Campbell & Robert J. Shiller, 1988. "Stock Prices, Earnings and Expected Dividends," Cowles Foundation Discussion Papers 858, Cowles Foundation for Research in Economics, Yale University.
    4. Bali, Turan G. & Cakici, Nusret, 2008. "Idiosyncratic Volatility and the Cross Section of Expected Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(1), pages 29-58, March.
    5. Lo, Andrew W & MacKinlay, A Craig, 1990. "When Are Contrarian Profits Due to Stock Market Overreaction?," The Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 175-205.
    6. Herskovic, Bernard & Kelly, Bryan & Lustig, Hanno & Van Nieuwerburgh, Stijn, 2016. "The common factor in idiosyncratic volatility: Quantitative asset pricing implications," Journal of Financial Economics, Elsevier, vol. 119(2), pages 249-283.
    7. Wei Huang & Qianqiu Liu & S. Ghon Rhee & Liang Zhang, 2010. "Return Reversals, Idiosyncratic Risk, and Expected Returns," The Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 147-168, January.
    8. Campbell, John Y & Shiller, Robert J, 1988. " Stock Prices, Earnings, and Expected Dividends," Journal of Finance, American Finance Association, vol. 43(3), pages 661-676, July.
    9. Ang, Andrew & Hodrick, Robert J. & Xing, Yuhang & Zhang, Xiaoyan, 2009. "High idiosyncratic volatility and low returns: International and further U.S. evidence," Journal of Financial Economics, Elsevier, vol. 91(1), pages 1-23, January.
    10. Fu, Fangjian, 2009. "Idiosyncratic risk and the cross-section of expected stock returns," Journal of Financial Economics, Elsevier, vol. 91(1), pages 24-37, January.
    11. Bekaert, Geert & Hodrick, Robert J. & Zhang, Xiaoyan, 2012. "Aggregate Idiosyncratic Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(6), pages 1155-1185, December.
    12. Bartram, Sohnke M. & Brown, Gregory W. & Stulz, Rene M., 2019. "Why is There a Secular Decline in Idiosyncratic Risk in the 2000s?," Working Paper Series 2019-19, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    13. Michael W. Brandt & Alon Brav & John R. Graham & Alok Kumar, 2010. "The Idiosyncratic Volatility Puzzle: Time Trend or Speculative Episodes?," The Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 863-899, February.
    14. Roll, Richard, 1984. "A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market," Journal of Finance, American Finance Association, vol. 39(4), pages 1127-1139, September.
    15. Tuomo Vuolteenaho, 2002. "What Drives Firm‐Level Stock Returns?," Journal of Finance, American Finance Association, vol. 57(1), pages 233-264, February.
    16. Bali, Turan G. & Cakici, Nusret & Whitelaw, Robert F., 2011. "Maxing out: Stocks as lotteries and the cross-section of expected returns," Journal of Financial Economics, Elsevier, vol. 99(2), pages 427-446, February.
    17. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    18. Kenneth A. Froot & André F. Perold, 1995. "New trading practices and short‐run market efficiency," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 15(7), pages 731-765, October.
    19. Zhanhui Chen & Ralitsa Petkova, 2012. "Does Idiosyncratic Volatility Proxy for Risk Exposure?," The Review of Financial Studies, Society for Financial Studies, vol. 25(9), pages 2745-2787.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alain-Philippe Fortin & Patrick Gagliardini & Olivier Scaillet, 2023. "Latent Factor Analysis in Short Panels," Swiss Finance Institute Research Paper Series 23-44, Swiss Finance Institute.
    2. Dávila, Eduardo & Parlatore, Cecilia, 2023. "Volatility and informativeness," Journal of Financial Economics, Elsevier, vol. 147(3), pages 550-572.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bai, Jennie & Bali, Turan G. & Wen, Quan, 2021. "Is there a risk-return tradeoff in the corporate bond market? Time-series and cross-sectional evidence," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1017-1037.
    2. Zhong, Angel, 2018. "Idiosyncratic volatility in the Australian equity market," Pacific-Basin Finance Journal, Elsevier, vol. 50(C), pages 105-125.
    3. Nektarios Aslanidis & Charlotte Christiansen & Neophytos Lambertides & Christos S. Savva, 2019. "Idiosyncratic volatility puzzle: influence of macro-finance factors," Review of Quantitative Finance and Accounting, Springer, vol. 52(2), pages 381-401, February.
    4. Thanh Huong Nguyen, 2019. "Information and Noise in Stock Markets: Evidence on the Determinants and Effects Using New Empirical Measures," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 7-2019.
    5. Wang, Jianqiu & Wu, Ke & Pan, Jiening & Jiang, Ying, 2023. "Disagreement, speculation, and the idiosyncratic volatility," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 232-250.
    6. Nartea, Gilbert V. & Wu, Ji, 2013. "Is there a volatility effect in the Hong Kong stock market?," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 119-135.
    7. Su, Zhi & Shu, Tengjia & Yin, Libo, 2018. "The pricing effect of the common pattern in firm-level idiosyncratic volatility: Evidence from A-Share stocks of China," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 497(C), pages 218-235.
    8. Kryzanowski, Lawrence & Mohsni, Sana, 2015. "Earnings forecasts and idiosyncratic volatilities," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 107-123.
    9. Hassen Raîs, 2016. "Idiosyncratic Risk and the Cross-Section of European Insurance Equity Returns," Post-Print hal-01764088, HAL.
    10. Nam, Kiseok & Khaksari, Shahriar & Kang, Moonsoo, 2017. "Trend in aggregate idiosyncratic volatility," Review of Financial Economics, Elsevier, vol. 35(C), pages 11-28.
    11. Rajnish Mehra & Sunil Wahal & Daruo Xie, 2021. "Is idiosyncratic risk conditionally priced?," Quantitative Economics, Econometric Society, vol. 12(2), pages 625-646, May.
    12. Lee, Seunghyup, 2022. "Political orientation and compensation for idiosyncratic risk," Economics Letters, Elsevier, vol. 218(C).
    13. Cotter, John & Sullivan, Niall O' & Rossi, Francesco, 2015. "The conditional pricing of systematic and idiosyncratic risk in the UK equity market," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 184-193.
    14. Nartea, Gilbert V. & Wu, Ji & Liu, Zhentao, 2013. "Does idiosyncratic volatility matter in emerging markets? Evidence from China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 137-160.
    15. Aboulamer, Anas & Kryzanowski, Lawrence, 2016. "Are idiosyncratic volatility and MAX priced in the Canadian market?," Journal of Empirical Finance, Elsevier, vol. 37(C), pages 20-36.
    16. Egginton, Jared & Hur, Jungshik, 2018. "The robust “maximum daily return effect as demand for lottery” and “idiosyncratic volatility puzzle”," Journal of Empirical Finance, Elsevier, vol. 47(C), pages 229-245.
    17. Miralles-Marcelo, José Luis & Miralles-Quirós, María del Mar & Miralles-Quirós, José Luis, 2012. "Asset pricing with idiosyncratic risk: The Spanish case," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 261-271.
    18. Vozlyublennaia, Nadia, 2013. "Do firm characteristics matter for the dynamics of idiosyncratic risk?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 35-46.
    19. Ayadi, Mohamed A. & Cao, Xu & Lazrak, Skander & Wang, Yan, 2019. "Do idiosyncratic skewness and kurtosis really matter?," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    20. Guo, Hui & Qiu, Buhui, 2014. "Options-implied variance and future stock returns," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 93-113.

    More about this item

    Keywords

    Idiosyncratic volatility; Industry volatility; Market volatility; Market microstructure;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:now:jnlcfr:104.00000128. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Lucy Wiseman (email available below). General contact details of provider: http://www.nowpublishers.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.