What Drives Idiosyncratic Volatility Over Time?

We document the patterns of market-wide and firm-specific volatility in the Portuguese stock market over the 1991-2005 period and test several explanations for the behavior of firm-level idiosyncratic volatility. Unlike previous studies we find no evidence of a statistically significant rise in firm-specific volatility. On the contrary, the ratio of firm-specific risk to total risk slightly decreases. We show that this result stems from the increased role of newly listings by larger privatized companies (that display lower firm-specific risk) and confirms the findings of prior research that claims that changes in idiosyncratic volatility result from changes in the composition of the market