Dissecting the idiosyncratic volatility puzzle: A fundamental analysis approach

Zhaobo Zhu, Wenjie Ding, Yi Jin and Dehua Shen

Research in International Business and Finance, 2023, vol. 66, issue C

Abstract: This paper argues fundamental information help resolve information uncertainty that leads to high idiosyncratic volatility premium. The IVOL-return relation is negative for stocks with poor fundamental strength but positive for stocks with strong fundamental strength. The arrival of fundamental news weakens the negative IVOL effect. Our findings are robust for alternative model specifications. Moreover, the negative IVOL effect dominates the positive IVOL effect due to arbitrage asymmetry that buying is easier than short selling stocks. Consistent with arbitrage asymmetry, the negative IVOL effect is stronger for stocks with low institutional ownership and following high investor sentiment. Overall, we provide a simple fundamental-based explanation for idiosyncratic volatility puzzle.

Keywords: Idiosyncratic volatility; Fundamental strength; Arbitrage asymmetry (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Dissecting the Idiosyncratic Volatility Puzzle: A Fundamental Analysis Approach (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:66:y:2023:i:c:s0275531923002118

DOI: 10.1016/j.ribaf.2023.102085

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