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Aggregate Idiosyncratic Volatility

Author

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  • Bekaert, Geert
  • Hodrick, Robert J.
  • Zhang, Xiaoyan

Abstract

We examine aggregate idiosyncratic volatility in 23 developed equity markets, measured using various methodologies. We find no evidence of upward trends after extending the sample to 2008. Instead, idiosyncratic volatility is well described by a stationary autoregressive process that occasionally switches into a higher-variance regime that has relatively short duration. We also document that idiosyncratic volatility is highly correlated across countries. Most of the time variation in idiosyncratic volatility can be attributed to variation in a growth opportunity proxy, total (U.S.) market volatility, and in most specifications, the variance premium, a business cycle sensitive risk indicator.

Suggested Citation

  • 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.
    • Handle: RePEc:cup:jfinqa:v:47:y:2012:i:06:p:1155-1185_00
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    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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