Dissecting the idiosyncratic volatility anomaly

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

Journal of Empirical Finance, 2020, vol. 59, issue C, 193-209

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.

Keywords: Idiosyncratic volatility anomaly; Robustness; Market microstructure effect; Microcaps; Penny stocks; Stock return reversal (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:59:y:2020:i:c:p:193-209

DOI: 10.1016/j.jempfin.2020.10.004

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