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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. [email protected].
Kristin E. Fink
Affiliation:
James Madison University, College of Business, MSC 0203, Harrisonburg, VA 22807. [email protected].
Gustavo Grullon
Affiliation:
Rice University, Jones Graduate School of Business, MS 531, 6100 Main St., Houston, TX 77005. [email protected].
James P. Weston
Affiliation:
Rice University, Jones Graduate School of Business, MS 531, 6100 Main St., Houston, TX 77005. [email protected].
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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

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