The common factor in idiosyncratic volatility: Quantitative asset pricing implications

Herskovic, Bernard; Kelly, Bryan T.; Lustig, Hanno; Nieuwerburgh, Stijn Van

doi:10.1016/j.jfineco.2015.09.010

Cited by 359 publications

(188 citation statements)

References 90 publications

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“…In the model, idiosyncratic risk is priced, because markets are segmented and investors are imperfectly diversified, consistent with the empirical link between household income risk and idiosyncratic stock return volatility (Herskovic et al (2016)), and employees' bias towards their own employer's stock in 401(k) plans (Benartzi (2001)). Investors derive utility from consumption relative to slowly-moving habit (Campbell and Cochrane (1999);Menzly et al (2004)), generating volatile and predictable stock returns as in the data.…”

Section: Introductionsupporting

confidence: 64%

“…On the asset pricing side, it is related to the literature studying the pricing of idiosyncratic risk in the stock market (Ang et al (2006b(Ang et al ( , 2009Johnson (2004);Fu (2009);Stambaugh et al (2015); Hou and Loh (2016); Herskovic et al (2016) (Laubach and Williams (2003); Cúrdia et al (2015)), that uses either using long-term historical data or dynamic stochastic equilibrium models. Similarly, Hartzmark (2016) uses estimated changes in expected macroeconomic volatility over time to argue that precautionary savings, driven by changing quantities of risk, is an important driver of real interest rates.…”

Section: Introductionmentioning

confidence: 99%

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Precautionary Savings in Stocks and Bonds

2016

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We document a strong and robust relation between the one-year real rate and precautionary savings motives, as measured by the stock market. Our novel proxy for precautionary savings, based on the difference in valuations between low-and highvolatility stocks, explains 37% of variation in the real rate. In addition, the real rate forecasts returns on the low-minus-high volatility portfolio, though it appears unrelated with measures of the quantity of risk. Our results suggest that precautionary savings motives, and thus the real rate, are driven by time-varying attitudes towards risk. We rationalize these findings in a stylized model with segmented investor clienteles and habit formation.⇤ We thank Hanno Lustig and seminar participants at the University of British Columbia for helpful comments. Pflueger gratefully acknowledges funding from the Social Sciences and Humanities Research Council of Canada (grant number 430-2014-00796). The Online Appendix to the paper can be found here and the Data Appendix can be found here.

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Section: Introductionsupporting

confidence: 64%

Section: Introductionmentioning

confidence: 99%

Precautionary Savings in Stocks and Bonds

2016

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“…19 Although, recent empirical evidence partly suggests otherwise (e.g., Ang et al, 2006;Herskovic et al, 2016;and Schürhoff & Ziegler, 2016), which is why we also examine idiosyncratic risk in the next section.…”

Section: A Derivation Of the Term Structure Relationmentioning

confidence: 99%

The Term Structure of Systematic and Idiosyncratic Risk

2017

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“…Laurini and Mauad (2015) include a common jump factor in a multivariate stochastic volatility model to account for crises and contagion in emerging countries' exchange rates markets. Herskovic et al (2016) show that not only firms' returns but also their volatilities exhibit a strong common factor structure. However, to the best of our knowledge, we are the first to model a common factor in the volatility of domestic output growth shocks as one of the potential sources of the Great Moderation.…”

Section: Introductionmentioning

confidence: 99%

Measuring the international dimension of output volatility

Everaert

Iseringhausen

2018

Journal of International Money and Finance

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This paper studies output fluctuations in a panel of OECD economies with the aim to decompose the evolution in output volatility into domestic and international factors. To this end we use a factor-augmented dynamic panel model with both domestic and international shocks and spillovers between countries through trade linkages. Changes in the volatility of output growth can be due to time-varying sensitivity to these shocks, changes in the propagation mechanism or shifts in the variances of shocks. We explicitly model cross-sectional dependence in the variance equation by specifying a common factor structure in the volatility of domestic shocks. The results show that while the size of international shocks and spillovers does not decrease in most countries, the volatilities of domestic shocks share a clear common decreasing trend. Hence, the 'Great Moderation' appears to be mainly driven by a decline in the volatility of domestic shocks rather than smaller international shocks. JEL classification: C32, E32, F44

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The common factor in idiosyncratic volatility: Quantitative asset pricing implications

Cited by 359 publications

References 90 publications

Precautionary Savings in Stocks and Bonds

Precautionary Savings in Stocks and Bonds

The Term Structure of Systematic and Idiosyncratic Risk

Measuring the international dimension of output volatility

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