Behavior patterns of idiosyncratic volatilities around millennium: on the relationship of idiosyncra

1
Behavior patterns of idiosyncratic volatilities
around millennium on the relationship of
idiosyncratic volatility, stock option, and
investors investment pattern

• Yong Lee
• 23 January 2008

2
Motivations

• A lot of research to rationalize the upward trend
  of idiosyncratic volatility after CLMX (JF, 2001)
  many competing explanations so far
• But, there is no unifying variable explaining the
  puzzling behavior near millennium soaring after
  1995 until 2000, then plunging back to normal
  levels of before 1994 ? structural break
  suspected
• Necessity to explain the puzzling behavior around
  millennium with more timely variables
  relationship of CEO compensation and Idio.Vol.
  or CEOs incentive to take advantage of
  Idio.Vol.s surge to maximize his options payoff
  or Investors speculative pattern
  comtemporaneously combined with CEOs incentive
  to manipulate stock return for purpose of
  boosting volatility, etc
• No study tried on potential relationship between
  stock option and idiosyncratic volatility
  regarding the upward trend, especially the puzzle
  during millennium

Research Questions

• Any relationship between CEOs manipulation,
  e.g., boosting volatility, backdating, and etc
  both economically and statistically significant
  during millennium?
• Regarding surge and plunge of volatility during
  millennium, any significant relationship
  contemporaneous combined with institution
  investors abnormal pattern and CEOs incentive
  to manipulate?
• We know backdating was more serious in small and
  tech firms than in large firms. Most of tech
  firms disappeared after millennium. Is plunge of
  Idio.Vol. after millennium attributed to the
  annihilation of tech firms in which their stocks
  were abnormally manipulated?
• Can those previous variables improve explanatory
  power statistically significantly, controlling
  for current variables used in literature
  profitability proxy (ROE, ROA, ect), turnover,
  issuing effect of Nasdaq and Amex, firms age,
  etc?

3
Literature

• Have individual stocks become more volatile? An
  empirical exploration of idiosyncratic risk
• Campbell, Lettau, Malkiel, and Xu
  (CLMX), 2001, JF
• Firm-specific risk and equity market development
• Brown and Kapadia (BK), 2007, JFE
• Why Did Individual Stocks Really Become More
  Volatile?
• Rubin and Smith (RS), 2007, SFU
  working paper
• Good Timing CEO Stock Option Awards and Company
  News Announcements
• Yermack, D. (1997), JF
• On the Timing of CEO Stock Option Awards
• Lie, E. (2005), MS

4
Variables

• Stock option dummy variables
• - whether stock option is awarded
• - whether unscheduled or
  scheduled award
• - size of granted options,
  abs(abnormal returns), and etc
• Other variables
• - ROE, ROA, dividend, turnover,
  age, Fama French factors,
• institution, and etc

Data Source

• Stock returns and their moments CRSP
• Financial statements
  Compustat
• CEO Stock option SPs
  ExecuComp
• Institutional investor ownership data CDA
  Spectrum