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The idiosyncratic volatility anomaly: Corporate investment or investor mispricing?

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  • Malagon, Juliana
  • Moreno, David
  • Rodríguez, Rosa

Abstract

Most of the literature on the idiosyncratic volatility anomaly has focused on plausible explanations for it based on investor preferences, investor irrationality or market characteristics. Surprisingly, the role of asset-pricing models and firm characteristics in the estimation of idiosyncratic risk measures has been largely neglected. Our results suggest that investment and profitability, presumably driven by managers and therefore linked to idiosyncratic risk, are able to account for the anomaly in a cross-section of stock returns. Moreover, we show that this effect is independent and complementary to the effects related to investor preference for skewness.

Suggested Citation

  • Malagon, Juliana & Moreno, David & Rodríguez, Rosa, 2015. "The idiosyncratic volatility anomaly: Corporate investment or investor mispricing?," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 224-238.
  • Handle: RePEc:eee:jbfina:v:60:y:2015:i:c:p:224-238
    DOI: 10.1016/j.jbankfin.2015.08.014
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    More about this item

    Keywords

    Idiosyncratic risk; Corporate investment; Investor mispricing; Valuation Theory; Accruals; Anomaly; Profitability;

    JEL classification:

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

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