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Idiosyncratic Volatility and Product Market Competition

  • Jos�-Miguel Gaspar

    (ESSEC Business School)

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    We investigate the link between a firm's competitive environment and the idiosyncratic volatility of its stock returns. We find that firms enjoying high market power, or established in concentrated industries, have lower idiosyncratic volatility. We posit that competition affects volatility in two distinct ways. Market power works as a hedging instrument that smoothes out idiosyncratic fluctuations. Also, market power lowers information uncertainty for investors and therefore return volatility. We find strong support for both effects. Our results contribute to the understanding of recent trends of idiosyncratic volatility and confirm the link between stock performance and firm's competitive environment.

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    File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?JB790517
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    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 79 (2006)
    Issue (Month): 6 (November)
    Pages: 3125-3152

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    Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:6:p:3125-3152
    Contact details of provider: Web page: http://www.journals.uchicago.edu/JB/

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