Recent Volatility in U.S. Equity Markets: A Review of Key Contributing Factors and Relationships

This paper is a review of volatility trends, factors, and relationships in U.S. equity markets, with emphasis on the period of time from 1980 to the present, when volatility has been at higher levels than what had been observed earlier. Both finance academics and investment professionals are affected by this ‘high-volatility’ environment, as it impacts the traditional relationships that connect risk and return, and can therefore alter both individual asset and portfolio allocation decisions. Based on a thorough review of the literature on a stock’s idiosyncratic volatility, we explain why it has increased in recent times, discuss factors that affect volatility level, and provide an overview of the empirical relationship between current volatility levels and future expected return. At the end of each section, we pose a related idea for future research – there are ten such ideas offered. The primary purposes of the paper are to convince the reader that volatility is an important investment consideration, to identify the major findings in recent volatility research, and to highlight some unanswered volatility questions for future academics and practitioners to explore.