Is There a Trend in Idiosyncratic Volatility?

[Sapphire Capital]

Is There a Trend in Idiosyncratic Volatility?

Geert Bekaert
Columbia University, Columbia Business School - Economics Department; National Bureau of Economic Research (NBER)

Robert J. Hodrick
Columbia Business School; National Bureau of Economic Research (NBER)

Xiaoyan Zhang
Cornell University - Samuel Curtis Johnson Graduate School of Management


July 1, 2008



Abstract:
We examine idiosyncratic volatility in 23 developed equity markets, measured using various alternative methodologies, and find no evidence that it is trending upward. Instead, idiosyncratic volatility appears to be best described by a stationary autoregressive process that occasionally switches into a higher-variance regime that has relatively short duration. We find evidence of a component in idiosyncratic volatility that is highly correlated across countries. Our results have important implications for studies of portfolio diversification and return volatilities.

papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1159565_code228871.pdf?abstractid=1108170&mirid=3