Publication: A model-independent measure of aggregate idiosyncratic risk
Program
KU-Authors
KU Authors
Co-Authors
Cakici, Nusret
Levy, Haim
Publication Date
Language
Type
Embargo Status
Journal Title
Journal ISSN
Volume Title
Alternative Title
Abstract
This paper introduces a model-independent measure of aggregate idiosyncratic risk, which does not require estimation of market betas or correlations and is based on the concept of gain from portfolio diversification. The statistical results and graphical analyses provide strong evidence that there are significant level and trend differences between the average idiosyncratic volatility measures of Campbell et al. [Campbell, J.Y., Lettau, M., Malkiel, B.G., and Xu, Y., 2001, Have individual stocks become more volatile? An empirical exploration of idiosyncratic risk, journal of Finance 56, 1-43.] and the new methodology. Although both approaches indicate a noticeable increase in the firm-level idiosyncratic risk, the volatility measure of CLMX is greater and has a stronger upward trend than the new idiosyncratic volatility measure. For both measures of idiosyncratic risk, the upward trend is found to be stronger for smaller. lower-priced, and younger firms. The analytical and empirical results show that the significant upward trend in the differences of the two idiosyncratic volatility measures is related to the increase in the cross-sectional dispersion of the volatility of individual stocks.
Source
Publisher
Elsevier
Subject
Business, finance, Economics
Citation
Has Part
Source
Journal of Empirical Finance
Book Series Title
Edition
DOI
10.1016/j.jempfin.2008.02.002