Investigating the Behavior of Idiosyncratic Volatility

This paper studies the behavior of idiosyncratic volatility for the post war period. Using aggregate idiosyncratic volatility statistics constructed from the Fama and French (1993) three-factor model, we find that the volatility of individual stocks appears to have increased over time. This trend is not solely attributed to the increasing prominence of the NASDAQ market. We go on to suggest that the idiosyncratic volatility of individual stocks is associated with the degree to which their shares are owned by financial institutions. Finally, we show that idiosyncratic volatility is also positively related to expected earning growth. ∗This work was supported by the Princeton University Center for Economic Policy Studies †We are grateful to John Y. Campbell, Jennifer Conrad, Francis X. Diebold, Charles Jones, Robin L. Lumsdaine, Albert Madansky (the editor), Jianping Mei, René Stultz, the anonymous referees, and seminar participants at the 2000 American Finance Association conference for extremely helpful comments. The address of the corresponding author: School of Management, the University of Texas at Dallas, Box 830688, Richardson, Texas 75083. Email: [email protected] Investigating the Behavior of Idiosyncratic Volatility