Can Growth Options Explain the Trend in Idiosyncratic Risk?
While recent studies document increasing idiosyncratic volatility over the past four decades, an explanation for this trend remains elusive. We establish a theoretical link between growth options available to managers and the idiosyncratic risk of equity. Empirically both the level and variance of c...
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| Veröffentlicht in: | The Review of financial studies 2008-11, Vol.21 (6), p.2599-2633 |
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| container_title | The Review of financial studies |
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| creator | Cao, Charles Simin, Timothy Zhao, Jing |
| description | While recent studies document increasing idiosyncratic volatility over the past four decades, an explanation for this trend remains elusive. We establish a theoretical link between growth options available to managers and the idiosyncratic risk of equity. Empirically both the level and variance of corporate growth options are significantly related to idiosyncratic volatility. Accounting for growth options eliminates or reverses the trend in aggregate firm-specific risk. These results are robust for different measures of idiosyncratic volatility, different growth option proxies, across exchanges, and through time. Finally, our results suggest that growth options explain the trend in idiosyncratic volatility beyond alternative explanations. |
| doi_str_mv | 10.1093/rfs/hhl039 |
| format | Article |
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We establish a theoretical link between growth options available to managers and the idiosyncratic risk of equity. Empirically both the level and variance of corporate growth options are significantly related to idiosyncratic volatility. Accounting for growth options eliminates or reverses the trend in aggregate firm-specific risk. These results are robust for different measures of idiosyncratic volatility, different growth option proxies, across exchanges, and through time. 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| ispartof | The Review of financial studies, 2008-11, Vol.21 (6), p.2599-2633 |
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| source | EBSCOhost Business Source Complete; JSTOR Archive Collection A-Z Listing; Oxford University Press Journals All Titles (1996-Current) |
| subjects | Business structures Capital assets Corporate growth Economic growth Economic theory Equity Estimation methods Financial engineering Financial research Financial risks Growth capital Growth rates Idiosyncratic risk Investments Nasdaq Composite Index Option pricing Portfolio management Proxy reporting Proxy statements Risk Risk management Securities analysis Statistical variance Stock prices Studies Time series Trends Volatility |
| title | Can Growth Options Explain the Trend in Idiosyncratic Risk? |
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