The Determinants of Idiosyncratic Volatility

Abstract

We investigate the cross-sectional and time-series determinants of idiosyncratic volatility in the Korean market. In particular, we focus on the empirical relation between firms’ asset growth rate and idiosyncratic stock return volatility. We find that, in the cross-section, companies with high idiosyncratic volatility tend to be small and highly leveraged, have high variance of ROE and Market to Book ratio, high turnover rate, and pay no dividends. Furthermore, firms with extreme (either high positive or negative) asset growth rates have high idiosyncratic return volatility than firms with moderate growth rates, suggesting the V-shaped relation between asset growth rate and idiosyncratic return volatility. We find that the V-shaped relation is robust even after controlling for other factors. In time-series, we find that firm-level idiosyncratic volatility is positively related to the dispersion of the cross-sectional asset growth rates. As a result, this study is contributed to show that the asset growth is the most important predictor of firm-level idiosyncratic return volatility in both the cross-section and the time-series in the Korean stock market. In addition, we show how the effect of risk factors varies with industries.

Citation

Khil, J., Kim, S.H. and Lee, E.J. (2017), "The Determinants of Idiosyncratic Volatility", Journal of Derivatives and Quantitative Studies: 선물연구, Vol. 25 No. 4, pp. 509-545. https://doi.org/10.1108/JDQS-04-2017-B0002