Working Paper: NBER ID: w22492
Authors: Shmuel M. Bartram; Gregory Brown; Ren M. Stulz
Abstract: From 1963 through 2015, idiosyncratic risk (IR) is high when market risk (MR) is high. We show that the positive relation between IR and MR is highly stable through time and is robust across exchanges, firm size, liquidity, and market-to-book groupings. Though stock liquidity affects the strength of the relation, the relation is strong for the most liquid stocks. The relation has roots in fundamentals as higher market risk predicts greater idiosyncratic earnings volatility and as firm characteristics related to the ability of firms to adjust to higher uncertainty help explain the strength of the relation. Consistent with the view that growth options provide a hedge against macroeconomic uncertainty, we find evidence that the relation is weaker for firms with more growth options.
Keywords: No keywords provided
JEL Codes: G10; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Aggregate Uncertainty (D89) | Market Risk (MR) (G17) |
| Aggregate Uncertainty (D89) | Idiosyncratic Risk (IR) (D81) |
| Market Risk (MR) (G17) | Idiosyncratic Earnings Volatility (D89) |
| Firm Characteristics (Liquidity, Growth Options) (D25) | Idiosyncratic Risk (IR) (D81) |
| Market Risk (MR) (G17) | Idiosyncratic Risk (IR) (D81) |
| Market Risk (MR) (G17) | Idiosyncratic Risk (IR) (D81) |