Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk

By John Y. Campbell, Martin Lettau, B. Malkiel, Yexiao Xu. 2001

2,539 citations recorded by the source corpus.

This paper uses a disaggregated approach to study the volatility of common stocks at the market, industry, and firm levels. Over the period from 1962 to 1997 there has been a noticeable increase in firm-level volatility relative to market volatility. Accordingly, correlations among individual stocks and the explanatory power of the market model for a typical stock have declined, whereas the number of stocks needed to achieve a given level of diversification has increased. All the volatility measures move together countercyclically and help to predict GDP growth. Market volatility tends to lead the other volatility series. Factors that may be responsible for these findings are suggested.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/9bc4753114890edffbfa46be9464f8f84958322d

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Citations in the corpus

Oil price volatility and the asymmetric response of gasoline prices to oil price increases and decreases (2005, methodology): “This may be less appealing compared to the GARCH model, but Campbell et al. (2001) point out that the benefit of this approach is that it does not require a parametric model describing the evolution of volatility over time.9 Pindyck (2004a) uses sample standard deviations of adjusted daily log…”
Asymmetric learning from financial information (2013, neutral): “…is more heterogeneity in the actions of financial market participants, as indicated by the higher volatility in asset prices (e.g., Schwert (1989), Campbell et al. (2001)), higher dispersion in analysts' forecasts (Barinov (2009)), or by the increased variation in strategies deployed by mutual…”
How Does Size Affect Mutual Fund Behavior (2008, neutral): “Campbell et al. (2001) shows that the average idiosyncratic risk of stocks increased during this period, so that the number of randomly chosen stocks required to reduce risk below a given level has increased.”
Can Growth Options Explain the Trend in Idiosyncratic Risk (2008, methodology): “This method does not require estimating individual firm betas, but it relies on an asset pricing model that is unable to explain the cross-section of returns as well as the multifactor models suggested by Fama and French (1992, 1993) and Carhart (1997). The Campbell et al.”
Why Did Individual Stocks Become More Volatile (2003, methodology): “Our …ndings are consistent with the remarks by Campbell et al (2001) that …nancial leverage is not the cause of the upward trend in the average stock return volatility and by Schwert (1989) that aggregate leverage is not responsible for the extremely high return volatility in the 1929-1933 Great…”
Diverging Trends in Aggregate and Firm Volatility (2006, background): “5 Another way of measuring the volatility inherent in the firm's environment is by focusing on the cross section, as Campbell et al. (2001) do.”