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Expected profitability, the 52-week high and the idiosyncratic volatility puzzle

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  • Maher Khasawneh
  • David G. McMillan
  • Dimos Kambouroudis

Abstract

We investigate the joint ability of fundamental-based and market-based news to explain the anomalous underperformance of stocks with high idiosyncratic volatility (high IVOL). An out-of-sample prediction of future profitability is adopted as a proxy for fundamental–based news while market-based news is represented by the 52-week high price ratio. A sample of UK stocks over the period January 1996 to December 2017 is analysed. The empirical results indicate that both the fundamental-based projected profitability and the 52-week high price ratio are important in explaining the IVOL anomaly. In contrast, individually, neither variable fully accounts for the anomaly. This relation is more pronounced following a period of high sentiment and during an upmarket. Further results suggest that underreaction lies at the heart of this explanation.

Suggested Citation

  • Maher Khasawneh & David G. McMillan & Dimos Kambouroudis, 2023. "Expected profitability, the 52-week high and the idiosyncratic volatility puzzle," The European Journal of Finance, Taylor & Francis Journals, vol. 29(14), pages 1621-1648, September.
    • Handle: RePEc:taf:eurjfi:v:29:y:2023:i:14:p:1621-1648
    DOI: 10.1080/1351847X.2022.2144401
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