Hostname: page-component-76fb5796d-qxdb6 Total loading time: 0 Render date: 2024-04-26T00:43:44.767Z Has data issue: false hasContentIssue false
  • English
  • Français

What Drove the Increase in Idiosyncratic Volatility during the Internet Boom?

Published online by Cambridge University Press:  12 August 2010

Jason Fink ,
Kristin E. Fink ,
Gustavo Grullon  and
James P. Weston
Jason Fink
Affiliation:
James Madison University, College of Business, MSC 0203, Harrisonburg, VA 22807. finkjd@jmu.edu.
Kristin E. Fink
Affiliation:
James Madison University, College of Business, MSC 0203, Harrisonburg, VA 22807. finkke@jmu.edu.
Gustavo Grullon
Affiliation:
Rice University, Jones Graduate School of Business, MS 531, 6100 Main St., Houston, TX 77005. grullon@rice.edu.
James P. Weston
Affiliation:
Rice University, Jones Graduate School of Business, MS 531, 6100 Main St., Houston, TX 77005. westonj@rice.edu.
Get access Rights & Permissions [Opens in a new window]

Abstract

Aggregate idiosyncratic volatility spiked nearly fivefold during the Internet boom of the late 1990s, dwarfing in magnitude a moderately increasing trend. While some researchers argue that this rise in idiosyncratic risk was the result of changes in the characteristics of public firms, others argue that it was driven by the changing sentiment of irrational traders. We present evidence that the marketwide decline in maturity of the typical public firm can explain most of the increase in firm-specific risk during the Internet boom. Controlling for firm maturity, we find no evidence that investor sentiment drives idiosyncratic risk throughout the Internet boom.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 45 , Issue 5 , October 2010 , pp. 1253 - 1278
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Baker, M., and Wurgler, J.. “Investor Sentiment and the Cross-Section of Stock Returns.” Journal of Finance, 61 (2006), 1645–1680.CrossRefGoogle Scholar
Bali, T; Cakici, N.; Yan, X.; and Zhang, Z.. “Does Idiosyncratic Risk Really Matter?” Journal of Finance, 60 (2005), 905–929.CrossRefGoogle Scholar
Brandt, M.; Brav, A.; Graham, J.; and Kumar, A.. “The Idiosyncratic Volatility Puzzle: Time Trend or Speculative Episodes?” Review of Financial Studies, 23 (2010), 863–899.CrossRefGoogle Scholar
Brown, G., and Kapadia, N.. “Firm-Specific Risk and Equity Market Development.” Journal of Financial Economics, 84 (2007), 358–388.CrossRefGoogle Scholar
Campbell, J.; Lettau, M.; Malkiel, B.; and Xu, Y.. “Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk.” Journal of Finance, 56 (2001), 1–43.CrossRefGoogle Scholar
Cao, C.; Simin, T.; and Zhao, J.. “Can Growth Options Explain the Trend in Idiosyncratic Risk?” Review of Financial Studies, 21 (2008), 2599–2633.CrossRefGoogle Scholar
Fama, E., and French, K.. “Industry Costs of Equity.” Journal of Financial Economics, 43 (1997), 153–193.CrossRefGoogle Scholar
Fama, E., and French, K.. “Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?” Journal of Financial Economics, 60 (2001), 3–43.CrossRefGoogle Scholar
Fama, E., and French, K.. “New Lists: Fundamentals and Survival Rates.” Journal of Financial Economics, 73 (2004), 229–269.CrossRefGoogle Scholar
Jin, L., and Myers, S.. " R 2 around the World: New Theory and New Tests." Journal of Financial Economics, 79 (2006), 257–292.CrossRefGoogle Scholar
Jovanovic, B., and Rousseau, P.. “Why Wait? A Century of Life before IPO.” American Economic Review, 91 (2001), 336–341.CrossRefGoogle Scholar
Loughran, T., and Ritter, J.. “Why Has IPO Underpricing Changed over Time?” Financial Management, 33 (2004), 5–37.Google Scholar
Malkiel, B., and Xu, Y.. “Idiosyncratic Risk and Security Returns.” Working Paper, University of Texas at Dallas (2002).Google Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Pastor, L., and Veronesi, P.. “Stock Valuation and Learning about Profitability.” Journal of Finance, 58 (2003), 1749–1789.CrossRefGoogle Scholar
Pastor, L., and Veronesi, P.. “Was There a Nasdaq Bubble in the Late 1990s?” Journal of Financial Economics, 81 (2006), 61–100.CrossRefGoogle Scholar
Ritter, J. “Summary Statistics on 1975–2000 Initial Public Offerings with an Offer Price of $5.00 or More.” Working Paper, University of Florida (2001).Google Scholar
Vogelsang, T. “Trend Function Hypothesis Testing in the Presence of Serial Correlation.” Econometrica, 66 (1998), 123–148.CrossRefGoogle Scholar
Wei, S. X., and Zhang, C.. “Why Did Individual Stocks Become More Volatile?” Journal of Business, 79 (2006), 259–292.CrossRefGoogle Scholar
Xu, Y., and Malkiel, B.. “Investigating the Behavior of Idiosyncratic Volatility.” Journal of Business, 76 (2003), 613–644.CrossRefGoogle Scholar