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The idiosyncratic volatility anomaly: Corporate investment or investor mispricing?

Juliana Malagon, David Moreno and Rosa Rodríguez

Journal of Banking & Finance, 2015, vol. 60, issue C, 224-238

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.

Keywords: Idiosyncratic risk; Corporate investment; Investor mispricing; Valuation Theory; Accruals; Anomaly; Profitability (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2015
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