Decomposing the idiosyncratic volatility anomaly among euro area stocks

Jan Annaert, Marc De Ceuster and Freek Van Doninck

Finance Research Letters, 2022, vol. 47, issue PB

Abstract: We estimate the widely documented idiosyncratic volatility premium at a statistically and economically significant −7.27 basis points monthly among euro area stocks. Furthermore, we test the robustness of Hou and Loh (2016; HL) US findings on the decomposition of the premium in fractions related to lottery characteristics and market frictions. In line with HL, we are able to explain approximately 30% of the anomaly with a balanced contribution between the two competing explanations. The bid–ask spread plays a large role in explaining the anomaly in the euro area, while HL find no consistent evidence for its importance in the US.

Keywords: Idiosyncratic volatility; Cross-section of stock returns; Lottery characteristics; Market frictions (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612322000010

DOI: 10.1016/j.frl.2022.102672

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