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Innovation and Idiosyncratic Risk

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Author Info
Mariana Mazzucato () (Economics Open University)
Massimiliano Tancioni

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Abstract

The paper studies whether “idiosyncratic riskâ€, i.e. the degree to which firm and industry specific returns are more volatile than aggregate market returns, is higher in innovative industries which are characterized by more risk and uncertainty. Volatility is studied both at the industry level (for 34 different industries from 1974-2003) and at the firm level (for 5 industries with different levels of innovativeness: biotech, pharmaceuticals, computers, textile, agriculture). Findings are mixed. A relationship between innovation and volatility emerges most strongly with firm level data, when firm dimension is accounted for, and when time varying volatility is explicitly studied via GARCH analysis. The latter highlights the distinctive behavior of returns during the course of the industry life-cycle.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 81.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:81

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Related research
Keywords: idiosyncratic risk; volatility; innovation; industry life cycle;

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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  19. John Y. Campbell & Martin Lettau & Burton G. Malkiel & Yexiao Xu, 2000. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," NBER Working Papers 7590, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  20. Malerba, Franco & Orsenigo, Luigi, 1996. "The Dynamics and Evolution of Industries," Industrial and Corporate Change, Oxford University Press, vol. 5(1), pages 51-87.
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  24. French, Kenneth R. & Roll, Richard, 1986. "Stock return variances : The arrival of information and the reaction of traders," Journal of Financial Economics, Elsevier, vol. 17(1), pages 5-26, September. [Downloadable!] (restricted)
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