Have individual stocks become more volatile? An empirical exploration of idiosyncratic risk

This paper uses a disaggregated approach to study the volatility of common stocks at the market, industry, and firm levels. Over the period from 1962 to 1997 there has been a noticeable increase in firm-level volatility relat ive to market volatility. Accordingly, correlations among individual stocks and the explanatory power of the market model for a typical stock have dec lined, whereas the number of stocks needed to achieve a given level of dive rsification has increased. All the volatility measures move together counte rcyclically and help to predict GDP growth. Market volatility tends to lead the other volatility series. Factors that may be responsible for these fin dings are suggested.