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Analysis of the idiosyncratic volatility in Europe : common factors and determinants

Abstract : In this study, we demonstrate the importance of idiosyncratic risk by verifying the existence of a common factor of idiosyncratic volatility in Europe that could have an effect on market portfolio volatility and its relationship with stock returns. As idiosyncratic volatility reflects firm-specific information, we seek to identify its determinants in corporate social responsibility (CSR) and in earnings quality. In the first chapter, we discuss the importance of idiosyncratic volatility by demonstrating that its common factor at the European level affects volatilities of national markets’ portfolios. In addition, we show that its relationship with stock returns is positive and that the idiosyncratic risk premium is explained by under-diversification proxies. In the second chapter, we provide evidence supporting that the effect of a firm’s CSR performance on idiosyncratic volatility is negative at the continental level. However, the significance of the impact depends on the country and on the time period. We detect CSR components associated with the most pronounced effect. In our third chapter, we document that the deterioration of the earnings quality increases the idiosyncratic volatility. The effect of this deterioration is strong in the case of the volatility of negative idiosyncratic returns. We also demonstrate that the informational environment reinforces this effect when it is opaque, and weakens it when it is healthy.
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Submitted on : Friday, July 1, 2022 - 6:21:42 PM
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Ahmed Khaled Farouk Soliman. Analysis of the idiosyncratic volatility in Europe : common factors and determinants. Business administration. Université Panthéon-Sorbonne - Paris I, 2021. English. ⟨NNT : 2021PA01E065⟩. ⟨tel-03711882⟩

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