Why is the volatility of single stocks so much rougher than that of the S&P500?

Othmane Zarhali, Cecilia Aubrun, Emmanuel Bacry (), Jean-Philippe Bouchaud and Jean-François Muzy ()
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Othmane Zarhali: CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Cecilia Aubrun: LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique, X - École polytechnique - IP Paris - Institut Polytechnique de Paris
Emmanuel Bacry: CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Jean-Philippe Bouchaud: Académie des sciences [Paris, France], X - École polytechnique - IP Paris - Institut Polytechnique de Paris, CFM - Capital Fund Management
Jean-François Muzy: SPE - Laboratoire « Sciences pour l’Environnement » (UMR CNRS 6134 SPE) - CNRS - Centre National de la Recherche Scientifique - Università di Corsica Pasquale Paoli [Université de Corse Pascal Paoli]

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Abstract: The Nested factor model was introduced by Chicheportiche et al. in [24] to represent nonlinear correlations between stocks. Stock returns are explained by a standard factor model, but the (log)-volatilities of factors and residuals are themselves decomposed into factor modes, with a common dominant volatility mode affecting both market and sector factors but also residuals. Here, we consider the case of a single factor where the only dominant log-volatility mode is rough, with a Hurst exponent H ≃ 0.11 and the log-volatility residuals are "super-rough", with H ≃ 0. We demonstrate that such a construction naturally accounts for the somewhat surprising stylized fact reported by Wu et al. in [23], where it has been observed that the Hurst exponents of stock indexes are large compared to those of individual stocks. We propose a statistical procedure to estimate the Hurst factor exponent from the stock returns dynamics together with theoretical guarantees of its consistency. We demonstrate the effectiveness of our approach through numerical experiments and apply it to daily stock data from the S&P500 index. The estimated roughness exponents for both the factor and idiosyncratic components validate the assumptions underlying our model

Keywords: Nested factor model log S-fBM model Hurst exponent small intermittency approximation; Nested factor model; log S-fBM model; Hurst exponent; small intermittency approximation; Statistical Finance (q-fin.ST); FOS: Economics and business (search for similar items in EconPapers)
Date: 2025-11-21
Note: View the original document on HAL open archive server: https://hal.science/hal-05376756v1
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-05376756

DOI: 10.48550/arXiv.2505.02678

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