The Calendar Effects of the Idiosyncratic Volatility Puzzle: A Tale of Two Days?

Jie Cao (), Tarun Chordia () and Xintong Zhan ()
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Jie Cao: Department of Finance, CUHK Business School, The Chinese University of Hong Kong, Hong Kong
Tarun Chordia: Goizueta Business School, Emory University, Atlanta, Georgia, 30322
Xintong Zhan: Department of Finance, CUHK Business School, The Chinese University of Hong Kong, Hong Kong; School of Management, Fudan University, Shanghai, China

Management Science, 2021, vol. 67, issue 12, 7866-7887

Abstract: The idiosyncratic volatility (IVOL) anomaly exhibits strong calendar effects. The negative relation between IVOL and the next-month return obtains mainly in the third week of the month. The IVOL-return relation is generally negative on Mondays and positive on Fridays. However, the positive impact is absent on the third Friday because of selling pressure from stocks delivered at option expiration. This imbalance between the negative and positive returns during the third week of the month has a large impact on the IVOL-return relation. Removing the third Friday and subsequent Monday return reduces the monthly IVOL effect by at least 40%.

Keywords: idiosyncratic volatility; calendar effects; option expiration (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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