Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk

John Y. Campbell, Martin Lettau, Burton G. Malkiel, Yexiao Xu

NBER Working Paper No. 7590
Issued in March 2000
NBER Program(s):   AP   EFG

This paper uses a disaggregated approach to study the volatility of common stocks at the market, industry, and firm levels. Over the period 1962-97 there has been a noticeable increase in firm-level volatility relative to market volatility. Accordingly correlations among individual stocks and the explanatory power of the market model for a typical stock have declined, while the number of stocks needed to achieve a given level of diversification has increased. All the volatility measures move together countercyclically and help to predict GDP growth. Market volatility tends to lead the other volatility series. Factors that may be responsible for these findings are suggested.

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Published: Campbell, John Y., Martin Lettau, Burton G. Malkiel and Yexiao Xu. "Have Individual Stocks Become More Volatile? An Empirical Exploration Of Idiosyncratic Risk," Journal of Finance, 2001, v56(1,Feb), 1-43.

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