Is There A Trend In Idiosyncratic Volatility?

The authors examine idiosyncratic volatility in 23 developed equity markets, measured using various alternative methodologies, and find no evidence that it is trending upward. Instead, idiosyncratic volatility appears to be well described by a stationary autoregressive process that occasionally switches into a higher-variance regime that has relatively short duration. They find evidence of a component in idiosyncratic volatility that is highly correlated across countries. Their results have important implications for studies of portfolio diversification and return volatilities.