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Idiosyncratic Volatility and Product Market Competition

José‐Miguel Gaspar and Massimo Massa
The Journal of Business
Vol. 79, No. 6 (November 2006), pp. 3125-3152
DOI: 10.1086/505251
Stable URL:
Page Count: 28
Subjects: Business Finance
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Idiosyncratic Volatility and Product Market Competition
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We investigate the link between a firm’s competitive environment and the idiosyncratic volatility of its stock returns. We find that firms enjoying high market power, or established in concentrated industries, have lower idiosyncratic volatility. We posit that competition affects volatility in two distinct ways. Market power works as a hedging instrument that smoothes out idiosyncratic fluctuations. Also, market power lowers information uncertainty for investors and therefore return volatility. We find strong support for both effects. Our results contribute to the understanding of recent trends of idiosyncratic volatility and confirm the link between stock performance and firm's competitive environment.

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