William Waller

Over the last few decades U.S. stocks have become significantly more volatile. This result holds even when excluding the financial crisis period of 2008-2009. Both the market index and individual stocks have become more volatile indicating that higher volatility is not just the result of higher idiosyncratic risk or increased correlations among stocks. Instead, the increase in risk is due entirely to more frequent and more extreme spikes in volatility. We find that after decomposing volatility into a long-run component and a transitory component, there is no meaningful trend in the long-run component. In contrast, our measure of transitory volatility has tripled over the last 40 years. The upward trend in the transitory component is primarily the result of changing characteristics of the typical publicly-traded firm due to the appearance of many new and riskier firms (e.g., technology stocks). Our findings show that the expansion of U.S. stock markets in recent decades has fundamentally altered the types of risks born by equity investors.