Fundamental Uncertainties and Firm-level Stock Volatilities
AbstractFirm-level stock volatility has increased significantly since 1962 and varies widely across industries. Recent literature shows that the excessive and persistent stock volatility can be well explained by fundamental uncertainties. This paper conducted panel data analyses on 415 firms during 1988-2001 in an effort to study the extent to which variation of individual stock returns can be explained by fundamental uncertainties. Mainly, we examined the uncertainty effects of demand shifts and a firmâ€™s innovative activities as well as other firm and industry characteristic variables on firm level idiosyncratic stock volatility. The results from the panel data analyses suggest that R&D intensive firms or firms in high-tech industries have more volatile returns. Idiosyncratic volatility is higher when there is greater demand uncertainty. Data also support the prediction that idiosyncratic volatility is higher for small firms and a firm with higher volatility of profitability. In addition, we find some evidence that idiosyncratic volatility increases with variation in analystsâ€™ earnings forecasts used as a proxy for changes in expectations that are associated with uncertainty and heterogeneous belief. Trading volume, which is used as a control variable for the information arrival, is found to endogenously increase idiosyncratic volatility. Furthermore, a firmâ€™s leverage is observed to have a significant and positive effect on idiosyncratic volatility in our whole panel data sample as well as the down market sample. However, we also observed a reverse leverage effect in the upward market sample. Finally, various empirical tests suggest that the idiosyncratic volatilities are persistent.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 466.
Date of creation: 11 Nov 2005
Date of revision:
stochastic volatility; factor analysis; Idiosyncratic risk; fundamental uncertainties;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.