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Idiosyncratic Return Volatility, Cash Flows, and Product Market Competition

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Author Info
Paul J. Irvine
Jeffrey Pontiff

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Abstract

Over the past 40 years, the volatility of the average stock return has drastically outpaced total market volatility. Thus, idiosyncratic return volatility has dramatically increased. We estimate this increase to be 6% per year. Consistent with an efficient market, this result is mirrored by an increase in the idiosyncratic volatility of fundamental cash flows. We argue that these findings are attributable to the more intense economy-wide competition. Various cross-sectional and time-series tests support this idea. Economic competitiveness facilitates reinterpretation of the results from the cross-country R-super-2 literature, as well as the US idiosyncratic risk literature. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhn039
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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 22 (2009)
Issue (Month): 3 (March)
Pages: 1149-1177
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Handle: RePEc:oup:rfinst:v:22:y:2009:i:3:p:1149-1177

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  1. Timotheos Angelidis & Nikolaos Tessaromatis, 2007. "Idiosyncratic Risk in Greece: Properties and Portfolio Implications," Working Papers 0001, University of Peloponnese, Department of Economics. [Downloadable!]
  2. Karolyi, G. Andrew & Lee, Kuan Hui & van Dijk, Mathijs A., 2007. "Common Patterns in Commonality in Returns, Liquidity, and Turnover around the World," Working Paper Series 2007-16, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  3. Hou, Kewei & Peng, Lin & Xiong, Wei, 2006. "R2 and Price Inefficiency," Working Paper Series 2006-23, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  4. Diego Comin & Thomas Philippon, 2005. "The Rise in Firm-Level Volatility: Causes and Consequences," NBER Working Papers 11388, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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