IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/24270.html
   My bibliography  Save this paper

Why has Idiosyncratic Risk been Historically Low in Recent Years?

Author

Listed:
  • Söhnke M. Bartram
  • Gregory W. Brown
  • René M. Stulz

Abstract

Since 1965, average idiosyncratic risk (IR) has never been lower than in recent years. In contrast to the high IR in the late 1990s that has drawn considerable attention in the literature, average market-model IR is 44% lower in 2013-2017 than in 1996-2000. Macroeconomic variables help explain why IR is lower, but using only macroeconomic variables leads to large prediction errors compared to using only firm-level variables. As a result of the dramatic change in the number and composition of listed firms since the late 1990s, listed firms are larger and older. Larger and older firms have lower idiosyncratic risk. Models that use firm characteristics to predict firm-level idiosyncratic risk estimated over 1963-2012 can largely or completely explain why IR is low over 2013-2017. The same changes that bring about historically low IR lead to unusually high market-model R-squareds.

Suggested Citation

  • Söhnke M. Bartram & Gregory W. Brown & René M. Stulz, 2018. "Why has Idiosyncratic Risk been Historically Low in Recent Years?," NBER Working Papers 24270, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24270
    Note: AP
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w24270.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Beaver, William H. & McNichols, Maureen F. & Wang, Zach Z., 2020. "Increased market response to earnings announcements in the 21st century: An Empirical Investigation," Journal of Accounting and Economics, Elsevier, vol. 69(1).
    2. Everett Grant & Julieta Yung, 2019. "Upstream, Downstream & Common Firm Shocks," Globalization Institute Working Papers 360, Federal Reserve Bank of Dallas.
    3. Shuai Shao & Robert Stoumbos & X. Frank Zhang, 2021. "The power of firm fundamental information in explaining stock returns," Review of Accounting Studies, Springer, vol. 26(4), pages 1249-1289, December.
    4. Perera, Kasun & Kuruppuarachchi, Duminda & Kumarasinghe, Sriyalatha & Suleman, Muhammad Tahir, 2023. "The impact of carbon disclosure and carbon emissions intensity on firms' idiosyncratic volatility," Energy Economics, Elsevier, vol. 128(C).
    5. Ray Ball & Gil Sadka & Ayung Tseng, 2022. "Using accounting earnings and aggregate economic indicators to estimate firm-level systematic risk," Review of Accounting Studies, Springer, vol. 27(2), pages 607-646, June.
    6. Karen X. Yan & Qi Li, 2018. "Nonparametric Estimation of a Conditional Quantile Function in a Fixed Effects Panel Data Model," JRFM, MDPI, vol. 11(3), pages 1-10, August.

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:24270. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.