Does the business cycle explain changes and trends in idiosyncratic stock risk?
- Area of Honors:
- Bachelor of Science
- Document Type:
- Thesis Supervisors:
- James Alan Miles, Honors Advisor
- Joseph Randall Woolridge, Thesis Supervisor
- idiosyncratic risk
- business cycle
- S&P 500
- firm-specific risk
- Recent studies have focused on levels of idiosyncratic risk and the rising amount of volatility in stock returns. However, researchers have struggled to agree upon an explanation for this trend. In this thesis, numerous potential factors for changes in firm-specific risk and the overall level of idiosyncratic risk in financial markets is explored. I hope to show how the average level of idiosyncratic risk has changed in the last two decades and explain the factors that lead to these changes in idiosyncratic stock risk. Next, I hope to assess the relationship between idiosyncratic risk and numerous business cycle variables in an effort to prove that changes in the business cycle are causing idiosyncratic volatility to change over time.