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Dissecting the idiosyncratic volatility anomaly

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  • Chen, Linda H.
  • Jiang, George J.
  • Xu, Danielle D.
  • Yao, Tong

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.

Suggested Citation

  • Chen, Linda H. & Jiang, George J. & Xu, Danielle D. & Yao, Tong, 2020. "Dissecting the idiosyncratic volatility anomaly," Journal of Empirical Finance, Elsevier, vol. 59(C), pages 193-209.
    • Handle: RePEc:eee:empfin:v:59:y:2020:i:c:p:193-209
    DOI: 10.1016/j.jempfin.2020.10.004
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    More about this item

    Keywords

    Idiosyncratic volatility anomaly; Robustness; Market microstructure effect; Microcaps; Penny stocks; Stock return reversal;
    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

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