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Idiosyncratic Volatility and Product Market Competition

Author

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  • Massa, Massimo
  • Gaspar, José-Miguel

Abstract

This Paper investigates the link between a firm?s competitive environment and the idiosyncratic volatility of its stock returns. We find that firms enjoying high market power, or established in concentrated industries, have lower idiosyncratic volatility. We posit that competition affects volatility in two distinct and inter-related ways. Market power works as a hedging instrument that smoothes out idiosyncratic fluctuations. At the same time, a high degree of market power implies lower information uncertainty for investors and therefore lower return volatility. We find strong support for both effects. Our results contribute to the understanding of recent trends of idiosyncratic volatility, and confirm the important link between stock market performance and the competitive environment of firms.

Suggested Citation

  • Massa, Massimo & Gaspar, José-Miguel, 2004. "Idiosyncratic Volatility and Product Market Competition," CEPR Discussion Papers 4812, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4812
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    Citations

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    Cited by:

    1. Chun, Hyunbae & Kim, Jung-Wook & Morck, Randall & Yeung, Bernard, 2008. "Creative destruction and firm-specific performance heterogeneity," Journal of Financial Economics, Elsevier, vol. 89(1), pages 109-135, July.
    2. J. Christina Wang, 2006. "Financial innovations, idiosyncratic risk, and the joint evolution of real and financial volatilities," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.

    More about this item

    Keywords

    Idiosyncratic volatility; Competition; Market powers; Uncertainty;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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