Idiosyncratic Volatility and Product Market Competition

Massimo Massa and Gaspar, José-Miguel

No 4812, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This Paper investigates the link between a firm?s competitive environment and the idiosyncratic volatility of its stock returns. We find that firms enjoying high market power, or established in concentrated industries, have lower idiosyncratic volatility. We posit that competition affects volatility in two distinct and inter-related ways. Market power works as a hedging instrument that smoothes out idiosyncratic fluctuations. At the same time, a high degree of market power implies lower information uncertainty for investors and therefore lower return volatility. We find strong support for both effects. Our results contribute to the understanding of recent trends of idiosyncratic volatility, and confirm the important link between stock market performance and the competitive environment of firms.

Keywords: Idiosyncratic volatility; Competition; Market powers; Uncertainty (search for similar items in EconPapers)
JEL-codes: G10 G12 L11 (search for similar items in EconPapers)
Date: 2004-12
New Economics Papers: this item is included in nep-com and nep-fin
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Citations: View citations in EconPapers (2)

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