Abstract
We document strong global commonality in country- and firm-level idiosyncratic return variances across 23 developed markets, and develop a dynamic pricing model to explain the empirical pattern. The global common factor of idiosyncratic return variances is highly correlated with that of idiosyncratic cash flow variances, and is also significantly related to variables capturing aggregate discount rate variation and growth opportunities. Furthermore, aggregate idiosyncratic return and cash flow variances are predominantly but not always countercyclical. Our evidence is mostly inconsistent with extant theories regarding the time variation in idiosyncratic return variances.
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