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Aggregate Idiosyncratic Volatility

  • Geert Bekaert
  • Robert J. Hodrick
  • Xiaoyan Zhang

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.

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File URL: http://www.nber.org/papers/w16058.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16058.

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Date of creation: Jun 2010
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Publication status: published as Bekaert, Geert & Hodrick, Robert J. & Zhang, Xiaoyan, 2012. "Aggregate Idiosyncratic Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(06), pages 1155-1185, December.
Handle: RePEc:nbr:nberwo:16058
Note: AP IFM
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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