Cross-sectional Dependence in Idiosyncratic Volatility
Ilze Kalnina and
Cahiers de recherche from Centre interuniversitaire de recherche en Ã©conomie quantitative, CIREQ
This paper introduces a framework for analysis of cross-sectional dependence in the idiosyncratic volatilities of assets using high frequency data. We first consider the estimation of standard measures of dependence in the idiosyncratic volatilities such as covariances and correlations. Next, we study an idiosyncratic volatility factor model, in which we decompose the co-movements in idiosyncratic volatilities into two parts: those related to factors such as the market volatility, and the residual co-movements. When using high frequency data, naive estimators of all of the above measures are biased due to the estimation errors in idiosyncratic volatility. We provide bias-corrected estimators and establish their asymptotic properties. We apply our estimators to high-frequency data on 27 individual stocks from nine different sectors, and document strong cross-sectional dependence in their idiosyncratic volatilities. We also find that on average 74% of this dependence can be explained by the market volatility.
Keywords: high frequency data; idiosyncratic volatility; factor structure; cross-sectional returns (search for similar items in EconPapers)
JEL-codes: C14 C22 (search for similar items in EconPapers)
Pages: 63 pages
New Economics Papers: this item is included in nep-ecm and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
Working Paper: Cross-sectional dependence in idiosyncratic volatility (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:mtl:montec:08-2015
Access Statistics for this paper
More papers in Cahiers de recherche from Centre interuniversitaire de recherche en Ã©conomie quantitative, CIREQ Contact information at EDIRC.
Bibliographic data for series maintained by Sharon BREWER ().