Why are U.S. Stocks More Volatile?

Bartram, Söhnke M. and Brown, Gregory W. and Stulz, René M. (2012): Why are U.S. Stocks More Volatile? Published in: Journal of Finance , Vol. 67, No. 4 (August 2012): pp. 1329-1370.

Abstract

U.S. stocks are more volatile than stocks of similar foreign firms. A firm’s stock return volatility can be higher for reasons that contribute positively (good volatility) or negatively (bad volatility) to shareholder wealth and economic growth. We find that the volatility of U.S. firms is higher mostly because of good volatility. Specifically, stock volatility is higher in the U.S. because it increases with investor protection, stock market development, new patents, and firm-level investment in R&D. Each of these factors are related to better growth opportunities for firms and better ability to take advantage of these opportunities.

• Item Type: MPRA Paper
• Language: English
• Keywords: Firm risk, volatility, idiosyncratic risk, R-squared
• Subjects: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

References

Acemoglu, Daron, Simon Johnson, James A. Robinson, and Yunyong Thaicharoen, 2003, Institutional causes, macroeeconomic symptoms: Volatility, crises and growth, Journal of Monetary Economics 50, 49-123.

Acemoglu, Daron, and Fabrizio Zilibotti, 1997, Was Prometheus unbound by chance? Risk, diversification, and growth, Journal of Political Economy 105, 709-751.

Acharya, Viral, Yakov Amihud, and Lubomir Litov, 2008, Credit rights and corporate risk-taking, Unpublished manuscript, London Business School, London.

Bartram, Söhnke M., Gregory W. Brown, and Jennifer Conrad, 2011, The effects of derivatives on firm risk and value, Journal of Financial and Quantitative Analysis, forthcoming.

Beck, Thorsten, Asli Demirgüç-Kunt, and Ross Levine, 2000, A new database on financial development and structure, World Bank Economic Review 14, 597-605.

Bekaert, Geert and Campbell R. Harvey, 1997, Emerging equity market volatility, Journal of Financial Economics 43, 29-77.

Bekaert, Geert, and Campbell R. Harvey, 2000, Foreign speculators and emerging equity markets, Journal of Finance 55, 565-613.

Bekaert, Geert, Campbell R. Harvey, and Christian Lundblad, 2005, Does financial liberalization spur growth? Journal of Financial Economics 77, 3-55.

Bekaert, Geert, Campbell R. Harvey, and Christian Lundblad, 2007, Liquidity and expected returns: Lessons from emerging markets, Review of Financial Studies 20, 1783-1831.

Bekaert, Geert, Campbell R. Harvey, Christian Lundblad, and Stephan Siegel, 2007, Global growth opportunities and market integration, Journal of Finance 62(3), 1081-1137.

Bekaert, Geert, Robert J. Hodrick, and Xiaoyan Zhang, 2010, Aggregate idiosyncratic volatility, Unpublished manuscript, Columbia University, New York, NY.

Campbell, John, Martin Lettau, Burton Malkiel, and Yexiao Xu, 2001, Have individual stocks become more volatile? An empirical exploration of idiosyncratic risk, Journal of Finance 56, 1-43.

Cao, Charles, Tim Simin, and Jing Zhao, 2008, Do growth options explain the trend in firm-specific risk? Review of Financial Studies 21(6), 2599-2634.

Comin, Diego, and Thomas Philippon, 2005, The rise in firm-level volatility: Causes and consequences, NBER Macroeconomic Annual.

Dahlquist, Magnus, Lee Pinkowitz, René M. Stulz, and Rohan Williamson, 2003, Corporate governance and the home bias, Journal of Financial and Quantitative Analysis 38, 87-111.

Demirguc-Kunt, Asli and Vojislav Maksimovic, 1999, Institutions, financial markets, and firm debt maturity, Journal of Financial Economics 54(3), 295-336.

Djankov, Simeon, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, 2008, The law and economics of self-dealing, Journal of Financial Economics 88, 430-465.

Djankov, Simeon, Caralee McLiesh, and Andrei Shleifer, 2007, Private credit in 120 countries, Journal of Financial Economics 84, 299-329.

Doidge, Craig, C., Andrew Karolyi, and René M. Stulz, 2007, Why do countries matter so much for corporate governance?, Journal of Financial Economics 86(1), 1-39.

Drucker, Steve, and Manju Puri, 2005, On the benefits of concurrent lending and underwriting, Journal of Finance 60(6), 2763-2799.

Edison, Hali J., and Francis E. Warnock, 2003, A simple measure of the intensity of capital controls, Journal of Empirical Finance 10, 81-103.

Fernandes, Nuno, and Miguel A. Ferreira, 2008, Does international cross-listing improve the information environment?, Journal of Financial Economics 88, 216-244.

Furman, Jeffrey L., Michael E. Porter, and Scott Stern, 2001, The determinants of national innovative capacity, Research Policy 31(6), 899-993.

Garmaise, Mark J., and Jun Liu, 2005, Corruption, firm governance, and the cost of capital, Unpublished manuscript, UCLA, CA.

Griffin, John, Patrick J. Kelly, and Frederico Nardari, 2008, Do market efficiency measures yield correct inferences? A comparison of developed and emerging markets, Review of Financial Studies 23, 3225-3277.

Guo, Hui, and Robert Savickas, 2011, Average idiosyncratic volatility in G7 countries, Review of Financial Studies 21(3),1259-1296.

Ince, Ozgur S., and R. Burt Porter, 2006, Individual equity return data from Thomson Datastream: Handle with care!, Journal of Financial Research 29, 463-479.

Irvine, Paul J., and Jeffrey Pontiff, 2009, Idiosyncratic return volatility, cash flows, and product market competition, Review of Financial Studies 22, 1149-1177.

Ito, Hiro and Menzie Chinn, 2008, A new measure of financial openness, Journal of Comparative Policy Analysis (10)3, 309-322.

Jin, Li, and Stewart Myers, 2007, R-squared around the world: New theory and new tests, Journal of Financial Economics 79(2), 257-292.

John, Kose, Lubomir Litov, and Bernard Yeung, 2008, Corporate governance and risk-taking, Journal of Finance, 1679-1728.

Johnson, Simon, John McMillan and Christopher Woodruff, 2002, Property rights and finance, American Economic Review 95(5), 1335-1356.

Karolyi, Andrew G., and René M. Stulz, 2003, Are assets priced locally or globally?, in G. Constantinides, M. Harris and R. Stulz, eds.: The Handbook of the Economics of Finance (North-Holland Publishers, New York, NY).

Kaufman, Daniel, Aart Kraay, and Massimo Mastruzzi, 2007, Governance matters VI: Governance indicators for 1996-2006, World Bank Policy Research Working Paper No. 4280.

Kelly, Patrick, 2007, Information Efficiency and Firm-Specific Return Variation, Unpublished manuscript, University of South Florida.

La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny, 1998, Law and finance, Journal of Political Economy 106(6), 1113-1155.

Lee, Peggy M., and Sunil Wahal, 2004, Grandstanding, certification and the underpricing of venture capital backed IPOs, Journal of Financial Economics 73(2), 375-407.

LeRoy, Stephen F., and Richard D. Porter, 1981, The present-value relation: Tests based on implied variance bounds, Econometrica 49(3), 555-574.

Lesmond, David A., 2005, Liquidity of emerging markets, Journal of Financial Economics 77, 411-452.

Levine, Ross, and Sara Zervos, 1998, Stock markets, banks, and economic growth, American Economic Review 88(3), 537-558.

Michelacci, Claudio, and Fabiano Schivardi, 2008, Does idiosyncratic business risk matter? working paper, Center for Economic Policy Research, London.

Morck, Randall, Bernard Yeung, and Wayne Yu, 2000, The information content of stock markets: Why do emerging markets have synchronous stock price movements? Journal of Financial Economics 58, 215-260.

Myers, Stewart C. and Nicholas S. Majluf, 1984, Corporate financing and investment decisions when firms have information that investors do not have, Journal of Financial Economics 13, 187-221.

Newey, Whitney K, and Kenneth D. West, 1987, A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix, Econometrica, 55, 703-08.

Obstfeld, Maurice, 1994, Risk-taking, global diversification, and growth, American Economic Review 84, 1310-1329.

Pastor, Lubos and Veronesi, Pietro, 2003, Stock valuation and learning about profitability, Journal of Finance 58, 1749-1790.

Pastor, Lubos and Veronesi, Pietro, 2009, Technological Revolutions and Stock Prices, with Lubos Pastor, American Economic Review 99, 1451-1463.

Roll, Richard, 1988, R2, Journal of Finance 43, 541-566.

Spamann, Holger, 2010, The “antidirector rights index” revisited, Review of Financial Studies 23(2), 467-486.

Stulz, René M., 1999, Globalization, corporate finance, and the cost of capital, Journal of Applied Corporate Finance 12, 8-25.

Stulz, René M., 2003, Derivatives and Risk Management, Southwestern Publishing.

Stulz, René M., 2005, The limits of financial globalization, Journal of Finance 60, 1595-1638.

Teoh, Siew Hong, Yong (George) Yang, and Yinglei Zhang, 2008, R-square: Noise or firm-specific information?, Unpublished manuscript, University of California, Irvine.

Thesmar, David, and Mathias Koenig, 2004, Financial market development and the rise of firm level uncertainty, CEPR Discussion Paper, CEPR, London.