Dissecting the Idiosyncratic Volatility Puzzle: A Fundamental Analysis Approach

Zhaobo Zhu (), Wenjie Ding, Yi Jin and Dehua Shen
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Zhaobo Zhu: Audencia Business School, Shenzhen University [Shenzhen]
Wenjie Ding: SYSU - Sun Yat-sen University [Guangzhou]
Yi Jin: MUST - Macau University of Science and Technology

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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)
Date: 2023-10-01
New Economics Papers: this item is included in nep-rmg
Note: View the original document on HAL open archive server: https://audencia.hal.science/hal-04194180
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Citations: View citations in EconPapers (2)

Published in Research in International Business and Finance, 2023, 66

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Journal Article: Dissecting the idiosyncratic volatility puzzle: A fundamental analysis approach (2023)
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