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Short-Sale Constraints and the Non-January Idiosyncratic Volatility Puzzle

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Author Info
Doran, James
Jiang, Danling
Peterson, David

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Abstract

The underperformance of high idiosyncratic volatility stocks, as documented by Ang, Hodrick, Ying, and Zhang (2006, JF), is a pure non-January phenomenon. This non-January negative relation between idiosyncratic volatility and stock returns is more pronounced among firms with greater constraints in short selling, and when short-sale constraints are mitigated from the introduction of options and the end of the IPO lockup period. Apart from an average underperformance, highly volatile stocks also have the greatest dispersion in expected returns and in price reactions around earnings announcements. These findings support behavioral models suggesting that noise trading and investor overconfidence, combined with short-sale constraints, generate excess volatility, greater mispricing, and on average lower expected returns.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4995.

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Date of creation: 07 Aug 2007
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Handle: RePEc:pra:mprapa:4995

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Related research
Keywords: Idiosyncratic Volatility January Effect Limits of Arbitrage Short-Sale Constraints Noise Trading Overconfidence

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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