Trend in aggregate idiosyncratic volatility |
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Authors: | Kiseok Nam Shahriar Khaksari Moonsoo Kang |
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Institution: | 1. Department of Finance, Suffolk University, Boston, MA 02108, United States;2. Department of Marketing and Finance, Frostburg State University, Frostburg, MD 21532, United States |
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Abstract: | We suggest that price interaction among stocks is an important determinant of idiosyncratic volatility. We demonstrate that as more (less) stocks are listed in the markets, price interaction among stocks increases (decreases), and hence stocks, on average, become more (less) volatile. Our results show that price interaction has a significant positive effect of idiosyncratic volatility. The results of various robustness checks indicate that the effect of price interaction is still significant to the presence of liquidity, newly listed firms, cash flow variables, business cycle variables, and market volatility. Once the price interaction effect is taken into account, no trend remains in idiosyncratic volatility. We conclude that there is no trend, but a reflection of the positive effect of price interaction on idiosyncratic volatility. |
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Keywords: | G10 G12 Idiosyncratic return volatility Price interaction Small firm effect |
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