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Product Market Competition and Idiosyncratic Volatility:"Natural Hedge" or "Uncertainty"?

Author: YangZuo
Tutor: KongDongMin
School: Huazhong University of Science and Technology
Course: Finance
Keywords: Market Competition Idiosyncratic Volatility Natural Hedge Information Uncertainty
CLC: F830.91
Type: Master's thesis
Year: 2012
Downloads: 3
Quote: 0
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Abstract


The aim of this paper is to find the relationship between the competitive environmentsthat the enterprises pacing on the product market and their assets’ idiosyncratic volatility.According to the efficient market hypothesis, the heterogeneity fluctuation of earningsreflects the idiosyncratic volatility of enterprise operation cash flow and corporatedividend essentially. Therefore, when study the heterogeneity of stock fluctuations, it mustexist contacts between enterprise profits. This paper investigates the relationship betweenmarket competition and idiosyncratic volatility, and furthermore, examines the underlyingmechanism based on two arguments, i.e. natural hedge and information uncertainty. Wefind that,1). Market power and idiosyncratic volatility reveal significantly negativecorrelation;2). This kind of relationship mainly comes from uncertainty channel, whichmeans market power influences investors’uncertainty of firm’s future profitability;3). Thenatural hedge mechanism effect is not significant in Chinese stock market, that is, themarket power does not work well as a natural hedge to decrease the volatility of earningsand the idiosyncratic volatility. Our results have clear policy implications: the regulatorshould improve the quality of information disclosure, and reduce the uncertainty of marketinformation, so as to achieve the purpose of market stabilization.

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CLC: > Economic > Fiscal, monetary > Finance, banking > Finance, banking theory > Financial market > Securities market
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