A novel explanation for idiosyncratic volatility anomaly: An asset decomposition perspective

Hao Liu, Yue Chen, Wei Wan and Qun Zhang

Economics Letters, 2021, vol. 206, issue C

Abstract: While a number of explanations for the idiosyncratic volatility anomaly involve investor preferences, investor irrationality, or institutional settings, we decompose the idiosyncratic volatility into growth options and assets in place components. Our empirical results suggest that the growth options component cannot be diversified away; consequently, the idiosyncratic volatility anomaly is primarily driven by the effect of growth options on stock returns rather than that of assets in place. Our findings offer a novel perspective in explaining the idiosyncratic volatility anomaly.

Keywords: Idiosyncratic volatility anomaly; Growth options; Stock return (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:206:y:2021:i:c:s0165176521002718

DOI: 10.1016/j.econlet.2021.109994

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