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Idiosyncratic Equity Risk Two Decades Later

Author

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  • John Y. Campbell
  • Martin Lettau
  • Burton Malkiel
  • Yexiao Xu

Abstract

This paper reviews the literature on idiosyncratic equity volatility since the publication of “Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk†in 2001. We respond to replication studies by Chiah, Gharghori, and Zhong and by Leippold and Svaton, and we present volatility estimates through the end of 2021, significantly extending the period covered in our original paper as well as the two replication studies. After spiking in the 1999 to 2000 period, idiosyncratic volatility declined thereafter; but sharp increases in market, industry, and idiosyncratic volatility occurred during the global financial crisis of 2008 to 2009 and the COVID-19 pandemic of 2020 to 2021. We argue that market microstructure effects are not of first-order importance for volatility measurement, and we discuss the roles of fundamental factors and investor sentiment in driving the observed fluctuations in volatility.

Suggested Citation

  • John Y. Campbell & Martin Lettau & Burton Malkiel & Yexiao Xu, 2023. "Idiosyncratic Equity Risk Two Decades Later," Critical Finance Review, now publishers, vol. 12(1-4), pages 203-223, August.
    • Handle: RePEc:now:jnlcfr:104.00000128
    DOI: 10.1561/104.00000128
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    2. Alain-Philippe Fortin & Patrick Gagliardini & Olivier Scaillet, 2023. "Latent Factor Analysis in Short Panels," Swiss Finance Institute Research Paper Series 23-44, Swiss Finance Institute.
    3. Dichev, Ilia D. & Zheng, Xin, 2024. "The volatility of stock investor returns," Journal of Financial Markets, Elsevier, vol. 70(C).
    4. Dávila, Eduardo & Parlatore, Cecilia, 2023. "Volatility and informativeness," Journal of Financial Economics, Elsevier, vol. 147(3), pages 550-572.
    5. Roman Kräussl & Alessandro Tugnetti, 2024. "Non‐Fungible Tokens (NFTs): A Review of Pricing Determinants, Applications and Opportunities," Journal of Economic Surveys, Wiley Blackwell, vol. 38(2), pages 555-574, April.
    6. He, Feng & Liu, Guanchun & Hao, Jing & Li, Youwei, 2023. "CSR performance and firm idiosyncratic risk in a data-rich environment: The role of retail investor attention," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).

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    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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