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A novel explanation for idiosyncratic volatility anomaly: An asset decomposition perspective

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  • Liu, Hao
  • Chen, Yue
  • Wan, Wei
  • Zhang, Qun

Abstract

While a number of explanations for the idiosyncratic volatility anomaly involve investor preferences, investor irrationality, or institutional settings, we decompose the idiosyncratic volatility into growth options and assets in place components. Our empirical results suggest that the growth options component cannot be diversified away; consequently, the idiosyncratic volatility anomaly is primarily driven by the effect of growth options on stock returns rather than that of assets in place. Our findings offer a novel perspective in explaining the idiosyncratic volatility anomaly.

Suggested Citation

  • Liu, Hao & Chen, Yue & Wan, Wei & Zhang, Qun, 2021. "A novel explanation for idiosyncratic volatility anomaly: An asset decomposition perspective," Economics Letters, Elsevier, vol. 206(C).
    • Handle: RePEc:eee:ecolet:v:206:y:2021:i:c:s0165176521002718
    DOI: 10.1016/j.econlet.2021.109994
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    1. Chen, Haozhi & Zhang, Yue, 2023. "Research on the effect of firm-specific investor sentiment on the idiosyncratic volatility anomaly: Evidence from the Chinese market," Pacific-Basin Finance Journal, Elsevier, vol. 81(C).

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    More about this item

    Keywords

    Idiosyncratic volatility anomaly; Growth options; Stock return;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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