The Idiosyncratic Volatility Puzzle – Anomaly or Data Mining?

Leon Kowalke

Junior Management Science (JUMS), 2022, vol. 7, issue 4, 945-985

Abstract: In this study, I investigate the robustness of the idiosyncratic volatility puzzle to the configuration of the research design. Using the regression- as well as the portfolio-based concept, I start with the replication of the idiosyncratic volatility puzzle approving the findings of Ang et al. (2006). However, when idiosyncratic volatility is estimated from monthly data and a time window spanning 1 or 5 years, the puzzle vanishes, regardless of the research method employed. Similar result hold if only stocks with a market capitalization above the cross-sectional median or those with a price higher than 10$ are used. Independent of the weighting scheme, the puzzle is also absent in the regression-based context when the risk premia are estimated by generalized least squares weighting returns by the inverse of their variance estimates. The same finding is derived in the portfolio-based context by extending the holding period to 12 months or controlling for the past month maximum daily return.

Keywords: Idiosyncratic Volatility; Cross-section of stock returns; Predictability; Risk Premium; Robustness; Idiosyncratic Volatility; Cross-section of stock returns; Predictability; Risk Premium; Robustness (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:jumsac:295008

DOI: 10.5282/jums/v7i4pp945-985

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