WHY HAS IDIOSYNCRATIC VOLATILITY INCREASED IN EUROPE?

Jean-Etienne Palard
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Jean-Etienne Palard: University of Montesquieu Bordeaux IV IRGO — Institut de Recherche en Gestion des Organisations, 35 Avenue Abadil, 33100 Bordeaux, France

Chapter 14 in Risk Management and Value:Valuation and Asset Pricing, 2008, pp 337-378 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis paper documents the evolution of idiosyncratic volatility across a sample composed by the main 250 European listed companies between 1987 and 2003, and investigates the corporate determinants. We estimate two measures of financial volatility based on the decomposition of CAPM and on the model of Campbell et al. (2001). We show that both the industry-level and the firm-level volatilities have increased significantly between 1987 and 2003, whereas the market-level component has stayed relatively stable over the sample period. Then, we try to explain this phenomenon by exploring the corporate determinants of this increase. Similarly to Dennis and Strickland (2005), the results of panel data regressions show that the growth of idiosyncratic volatility is significantly correlated with the volume of stocks traded, the movement of corporate refocusing and the reinforcement of institutional investors in the ownership structure of European listed firms.

Keywords: Risk; Value; Management; Derivatives (search for similar items in EconPapers)
Date: 2008
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