Journal article
Dissecting the idiosyncratic volatility anomaly
Journal of empirical finance, Vol.59, pp.193-209
12/2020
DOI: 10.1016/j.jempfin.2020.10.004
Abstract
The idiosyncratic volatility (IVOL) anomaly, documented in Ang, et al. (2006), has garnered a great deal of attention in the literature. Yet questions remain regarding the robustness and pervasiveness of the IVOL anomaly, with a particular concern that the IVOL anomaly might simply be the manifestation of market microstructure effect. In this paper, we show that the IVOL anomaly is strong and pervasive after we exclude stocks most susceptible to market microstructure noise — such as microcap stocks, penny stocks, and stocks with strong short-term return reversal. These results are robust to equal-weighting or value-weighting stocks in the IVOL portfolios. Our findings suggest that rather than being the cause of the anomaly, market microstructure noise actually weakens the IVOL anomaly.
•There is concern that the IVOL anomaly is the manifestation of microstructure effect.•We show that the IVOL anomaly is strong after excluding stocks with high microstructure noise.•The IVOL anomaly is strong among non-microcaps, non-penny stocks, etc.•The results are robust to EW and VW portfolio approaches.•Market microstructure noise actually weakens the IVOL anomaly.
Details
- Title: Subtitle
- Dissecting the idiosyncratic volatility anomaly
- Creators
- Linda H Chen - Department of Accounting, College of Business and Economics, University of Idaho, Moscow, ID 83844-3161, USAGeorge J Jiang - Gary P. Brinson Chair of Investment Management, Department of Finance and Management Science, Todd Hall Addition 480A, College of Business, Washington State University, Pullman, WA, 99164-4746, USADanielle D Xu - School of Business Administration, Gonzaga University, Spokane, WA 99258, USATong Yao - Department of Finance, Henry B. Tippie College of Business, University of Iowa, USA
- Resource Type
- Journal article
- Publication Details
- Journal of empirical finance, Vol.59, pp.193-209
- Publisher
- Elsevier B.V
- DOI
- 10.1016/j.jempfin.2020.10.004
- ISSN
- 0927-5398
- eISSN
- 1879-1727
- Language
- English
- Date published
- 12/2020
- Academic Unit
- Finance
- Record Identifier
- 9984066102502771
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