The International Commonality of Idiosyncratic Variances

71 Pages Posted: 11 Jan 2019 Last revised: 14 May 2021

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

Xue Wang

Nankai University - School of Finance

Xiaoyan Zhang

Tsinghua University - PBC School of Finance

Date Written: May 1, 2019

Abstract

We document strong global commonality in country- and firm-level idiosyncratic return variances across 23 developed markets, and develop a dynamic pricing model to explain the empirical pattern. The global common factor of idiosyncratic return variances is highly correlated with that of idiosyncratic cash flow variances, and is also significantly related to variables capturing aggregate discount rate variation and growth opportunities. Furthermore, aggregate idiosyncratic return and cash flow variances are predominantly but not always countercyclical. Our evidence is mostly inconsistent with extant theories regarding the time variation in idiosyncratic return variances.

Keywords: return idiosyncratic variance, cash flow idiosyncratic variance, global commonality, countercyclical, state variables

JEL Classification: F39, G12, G15

Suggested Citation

Bekaert, Geert and Wang, Xue and Zhang, Xiaoyan, The International Commonality of Idiosyncratic Variances (May 1, 2019). Columbia Business School Research Paper Forthcoming, PBCSF-NIFR Research Paper, Available at SSRN: https://ssrn.com/abstract=3308987 or http://dx.doi.org/10.2139/ssrn.3308987

Geert Bekaert

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Xue Wang

Nankai University - School of Finance ( email )

38 Tongyan Road, Jinnan District
Tianjin, Tianjin 300350
China

Xiaoyan Zhang (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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