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The idiosyncratic component of stock returns and its relationship with macroeconomic variables in the U.S. market

Jacquemin, Hadrien ; Chakir, Elias
(2016)

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Jacquemin_82631400_2016.pdf
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Details

Supervisors
Iania, Leonardo
Faculty
Louvain School of Management
Degree label
Master [120] en sciences de gestion
Abstract
We examine the behavior of the idiosyncratic component of stock returns over the period 1995-2015 and its relationship with macroeconomic variables. Consistent with previous research, we find that idiosyncratic volatility increased until the end of the 1990’s and surged in the year 2000 due to the internet speculative bubble. We also document a spike in idiosyncratic volatility in July 2002 as well as a surge in 2008, in the wake of the subprime crisis. The linear relationship between idiosyncratic volatility and the inflation rate, the interest rate, the oil prices and the Gross Domestic Product (GDP) is investigated. We find a positive relationship between idiosyncratic volatility and the inflation rate and oil prices, whereas a negative relationship between idiosyncratic volatility and GDP and the interest rate is found.