IDEAS home Printed from https://ideas.repec.org/a/kap/rqfnac/v58y2022i1d10.1007_s11156-021-00999-w.html
   My bibliography  Save this article

The role of investor attention in idiosyncratic volatility puzzle and new results

Author

Listed:
  • Jungshik Hur

    (Louisiana Tech University)

  • Vivek Singh

    (University of Michigan-Dearborn)

Abstract

We find that stocks with low investor attention show a more substantial return-idiosyncratic volatility puzzle than stocks with high investor attention. We also document that high idiosyncratic volatility stocks with high investor attention at the end of the month when portfolios are formed are responsible for the puzzle, but they lose investor attention and have negative returns at the beginning of the next month. We further show that the idiosyncratic volatility puzzle exists only in the first half of the following month after portfolios are formed. It holds even for stocks with low investor attention.

Suggested Citation

  • Jungshik Hur & Vivek Singh, 2022. "The role of investor attention in idiosyncratic volatility puzzle and new results," Review of Quantitative Finance and Accounting, Springer, vol. 58(1), pages 409-434, January.
    • Handle: RePEc:kap:rqfnac:v:58:y:2022:i:1:d:10.1007_s11156-021-00999-w
    DOI: 10.1007/s11156-021-00999-w
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11156-021-00999-w
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11156-021-00999-w?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Peng, Lin & Xiong, Wei, 2006. "Investor attention, overconfidence and category learning," Journal of Financial Economics, Elsevier, vol. 80(3), pages 563-602, June.
    2. Simon Gervais & Ron Kaniel & Dan H. Mingelgrin, 2001. "The High‐Volume Return Premium," Journal of Finance, American Finance Association, vol. 56(3), pages 877-919, June.
    3. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
    4. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2007. "Down or Out: Assessing the Welfare Costs of Household Investment Mistakes," Journal of Political Economy, University of Chicago Press, vol. 115(5), pages 707-747, October.
    5. Harrison Hong & Jeremy C. Stein, 1999. "A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets," Journal of Finance, American Finance Association, vol. 54(6), pages 2143-2184, December.
    6. Lamoureux, Christopher G & Sanger, Gary C, 1989. " Firm Size and Turn-of-the-Year Effects in the OTC/NASDAQ Market," Journal of Finance, American Finance Association, vol. 44(5), pages 1219-1245, December.
    7. Wei Huang & Qianqiu Liu & S. Ghon Rhee & Liang Zhang, 2010. "Return Reversals, Idiosyncratic Risk, and Expected Returns," Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 147-168, January.
    8. Seasholes, Mark S. & Wu, Guojun, 2007. "Predictable behavior, profits, and attention," Journal of Empirical Finance, Elsevier, vol. 14(5), pages 590-610, December.
    9. Yuan, Yu, 2015. "Market-wide attention, trading, and stock returns," Journal of Financial Economics, Elsevier, vol. 116(3), pages 548-564.
    10. William N. Goetzmann & Alok Kumar, 2008. "Equity Portfolio Diversification," Review of Finance, European Finance Association, vol. 12(3), pages 433-463.
    11. Bhootra, Ajay & Hur, Jungshik, 2013. "The timing of 52-week high price and momentum," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3773-3782.
    12. Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2006. "The Cross‐Section of Volatility and Expected Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 259-299, February.
    13. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    14. Zhi Da & Joseph Engelberg & Pengjie Gao, 2015. "Editor's Choice The Sum of All FEARS Investor Sentiment and Asset Prices," Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 1-32.
    15. Stefano Dellavigna & Joshua M. Pollet, 2009. "Investor Inattention and Friday Earnings Announcements," Journal of Finance, American Finance Association, vol. 64(2), pages 709-749, April.
    16. Jegadeesh, Narasimhan, 1990. "Evidence of Predictable Behavior of Security Returns," Journal of Finance, American Finance Association, vol. 45(3), pages 881-898, July.
    17. Todd Mitton & Keith Vorkink, 2007. "Equilibrium Underdiversification and the Preference for Skewness," Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1255-1288.
    18. Fink, Jason & Fink, Kristin E. & Grullon, Gustavo & Weston, James P., 2010. "What Drove the Increase in Idiosyncratic Volatility during the Internet Boom?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(5), pages 1253-1278, October.
    19. Chan, K C & Chen, Nai-Fu, 1991. "Structural and Return Characteristics of Small and Large Firms," Journal of Finance, American Finance Association, vol. 46(4), pages 1467-1484, September.
    20. Hirshleifer, David & Teoh, Siew Hong, 2003. "Limited attention, information disclosure, and financial reporting," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 337-386, December.
    21. Brown, Philip & Keim, Donald B. & Kleidon, Allan W. & Marsh, Terry A., 1983. "Stock return seasonalities and the tax-loss selling hypothesis : Analysis of the arguments and Australian evidence," Journal of Financial Economics, Elsevier, vol. 12(1), pages 105-127, June.
    22. David Hirshleifer & Sonya Seongyeon Lim & Siew Hong Teoh, 2009. "Driven to Distraction: Extraneous Events and Underreaction to Earnings News," Journal of Finance, American Finance Association, vol. 64(5), pages 2289-2325, October.
    23. Campbell R. Harvey & Akhtar Siddique, 2000. "Conditional Skewness in Asset Pricing Tests," Journal of Finance, American Finance Association, vol. 55(3), pages 1263-1295, June.
    24. Gustavo Grullon, 2004. "Advertising, Breadth of Ownership, and Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 439-461.
    25. Bucher, Melk C., 2017. "Investor Attention and Sentiment: Risk or Anomaly?," Working Papers on Finance 1712, University of St. Gallen, School of Finance.
    26. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    27. Gur Huberman & Tomer Regev, 2001. "Contagious Speculation and a Cure for Cancer: A Nonevent that Made Stock Prices Soar," Journal of Finance, American Finance Association, vol. 56(1), pages 387-396, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Turan G. Bali & Robert F. Engle & Yi Tang, 2017. "Dynamic Conditional Beta Is Alive and Well in the Cross Section of Daily Stock Returns," Management Science, INFORMS, vol. 63(11), pages 3760-3779, November.
    2. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, November.
    3. David Hirshleife, 2015. "Behavioral Finance," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 133-159, December.
    4. Atilgan, Yigit & Bali, Turan G. & Demirtas, K. Ozgur & Gunaydin, A. Doruk, 2020. "Left-tail momentum: Underreaction to bad news, costly arbitrage and equity returns," Journal of Financial Economics, Elsevier, vol. 135(3), pages 725-753.
    5. Goodell, John W. & Kumar, Satish & Li, Xiao & Pattnaik, Debidutta & Sharma, Anuj, 2022. "Foundations and research clusters in investor attention: Evidence from bibliometric and topic modelling analysis," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 511-529.
    6. Bali, Turan G. & Cakici, Nusret & Whitelaw, Robert F., 2011. "Maxing out: Stocks as lotteries and the cross-section of expected returns," Journal of Financial Economics, Elsevier, vol. 99(2), pages 427-446, February.
    7. David Hirshleifer & Po-Hsuan Hsu & Dongmei Li, 2018. "Innovative Originality, Profitability, and Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 31(7), pages 2553-2605.
    8. Doron Avramov & Guy Kaplanski & Avanidhar Subrahmanyam, 2022. "Postfundamentals Price Drift in Capital Markets: A Regression Regularization Perspective," Management Science, INFORMS, vol. 68(10), pages 7658-7681, October.
    9. Guomei Tang & Xueyong Zhang, 2021. "Media attention to locations and the cross‐section of stock returns," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(S1), pages 2301-2336, April.
    10. Michaely, Roni & Rubin, Amir & Vedrashko, Alexander, 2016. "Are Friday announcements special? Overcoming selection bias," Journal of Financial Economics, Elsevier, vol. 122(1), pages 65-85.
    11. Songur, Hilmi & Heavilin, Jason E., 2017. "Abnormal research and development investments and stock returns," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 237-249.
    12. Yung, Kenneth & Nafar, Nadia, 2017. "Investor attention and the expected returns of reits," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 423-439.
    13. Hung, Weifeng & Lin, Ching-Ting & Yang, J. Jimmy, 2022. "Aggregate 52-week high, limited attention, and time-varying momentum profits," Journal of Banking & Finance, Elsevier, vol. 141(C).
    14. Wan, Xiaoyuan, 2018. "Is the idiosyncratic volatility anomaly driven by the MAX or MIN effect? Evidence from the Chinese stock market," International Review of Economics & Finance, Elsevier, vol. 53(C), pages 1-15.
    15. Vozlyublennaia, Nadia, 2014. "Investor attention, index performance, and return predictability," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 17-35.
    16. Turan G. Bali & Nusret Cakici & Robert F. Whitelaw, 2009. "Maxing Out: Stocks as Lotteries and the Cross-Section of Expected Returns," NBER Working Papers 14804, National Bureau of Economic Research, Inc.
    17. Nguyen, Hung T. & Truong, Cameron, 2018. "When are extreme daily returns not lottery? At earnings announcements!," Journal of Financial Markets, Elsevier, vol. 41(C), pages 92-116.
    18. Jungshik Hur & Vivek Singh, 2016. "Reexamining momentum profits: Underreaction or overreaction to firm-specific information?," Review of Quantitative Finance and Accounting, Springer, vol. 46(2), pages 261-289, February.
    19. Ji Cao & Marc Oliver Rieger & Lei Zhao, 2019. "Safety First, Loss Probability, and the Cross Section of Expected Stock Returns," Working Paper Series 2019-02, University of Trier, Research Group Quantitative Finance and Risk Analysis.
    20. Zhong, Angel & Chai, Daniel & Li, Bob & Chiah, Mardy, 2018. "Volume shocks and stock returns: An alternative test," Pacific-Basin Finance Journal, Elsevier, vol. 48(C), pages 1-16.

    More about this item

    Keywords

    Expected returns; Idiosyncratic volatility; Investor attention;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:58:y:2022:i:1:d:10.1007_s11156-021-00999-w. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.