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Aggregate idiosyncratic volatility in G7 countries

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Author Info
Hui Guo
Robert Savickas

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Abstract

The paper analyzes average idiosyncratic volatility in G7 countries. We find that idiosyncratic volatility is highly correlated across countries and there is a significant Granger causality from the U.S. to the other countries and vice versa. Consistent with U.S. data, when combined with stock market volatility, idiosyncratic volatility has significant predictive power for stock market returns and the value premium in many other G7 countries. Moreover, in U.S. data, idiosyncratic volatility has explanatory power for stock returns very similar to that of value premium volatility in both time-series and cross-sectional regressions. Our results suggest that idiosyncratic volatility proxies for systematic risk omitted from CAPM.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2004-027.

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Date of creation: 2006
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Handle: RePEc:fip:fedlwp:2004-027

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Keywords: Stock exchanges;

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