Why has Idiosyncratic Risk been Historically Low in Recent Years?

Söhnke Bartram, Gregory W. Brown and René Stulz

No 24270, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-bec, nep-fmk and nep-upt
Note: AP
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Citations: View citations in EconPapers (7)

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Working Paper: Why Has Idiosyncratic Risk Been Historically Low in Recent Years? (2018)
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