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Aggregate Idiosyncratic Volatility

Author

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  • Geert Bekaert
  • Robert J. Hodrick
  • Xiaoyan Zhang

Abstract

We examine aggregate idiosyncratic volatility in 23 developed equity markets, measured using various methodologies, and we find no evidence of upward trends when we extend the sample until 2008. Instead, idiosyncratic volatility appears to be 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. Finally, we examine the determinants of the time-variation in idiosyncratic volatility. In most specifications, the bulk of idiosyncratic volatility can be explained by a growth opportunity proxy, total (U.S.) market volatility, and in most but not all specifications, the variance premium, a business cycle sensitive risk indicator.

Suggested Citation

  • Geert Bekaert & Robert J. Hodrick & Xiaoyan Zhang, 2010. "Aggregate Idiosyncratic Volatility," NBER Working Papers 16058, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16058
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    References listed on IDEAS

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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