Working Paper: NBER ID: w7590
Authors: John Y. Campbell; Martin Lettau; Burton G. Malkiel; Yexiao Xu
Abstract: 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.
Keywords: volatility; idiosyncratic risk; stock market; GDP growth
JEL Codes: G10; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| individual stock volatility (G17) | firm-level volatility (D25) |
| increased idiosyncratic risk (G19) | changing dynamics of the stock market (G17) |
| stock volatility influences economic indicators (G17) | stock volatility might influence GDP growth (F62) |
| market volatility (G17) | other volatility series (C58) |