Average Idiosyncratic Volatility in G7 Countries

Posted: 2 Jul 2008

See all articles by Hui Guo

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Robert Savickas

George Washington University - School of Business - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 2008

Abstract

We argue that changes in average idiosyncratic volatility provide a proxy for changes in the investment opportunity set and that this proxy is closely related to the book-to-market factor. We test this idea in two ways using G7 countries data. First, we show that idiosyncratic volatility has statistically significant predictive power for aggregate stock market returns over time. Second, we show that idiosyncratic volatility performs just as well as the book-to-market factor in explaining the cross section of stock returns. Our results suggest that the hedge against changes in investment opportunities is an important determinant of asset prices.

Keywords: G1

Suggested Citation

Guo, Hui and Savickas, Robert, Average Idiosyncratic Volatility in G7 Countries (May 2008). The Review of Financial Studies, Vol. 21, Issue 3, pp. 1259-1296, 2008, Available at SSRN: https://ssrn.com/abstract=1154434 or http://dx.doi.org/hhn043

Hui Guo (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
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Cincinnati, OH 45221
United States
513.556.7077 (Phone)
513.556.0979 (Fax)

HOME PAGE: http://homepages.uc.edu/~guohu/

Robert Savickas

George Washington University - School of Business - Department of Finance ( email )

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2201 G Street, N.W.
Washington, DC 20052
United States
202-994-8936 (Phone)
202-994-5014 (Fax)

HOME PAGE: http://savickas.net/

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