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Arbitrage Asymmetry and the Idiosyncratic Volatility Puzzle

The Journal of finance (New York), 2015-10, Vol.70 (5), p.1903-1948 [Peer Reviewed Journal]

2015 American Finance Association ;2015 the American Finance Association ;Copyright Blackwell Publishers Inc. Oct 2015 ;ISSN: 0022-1082 ;EISSN: 1540-6261 ;DOI: 10.1111/jofi.12286 ;CODEN: JLFIAN

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  • Title:
    Arbitrage Asymmetry and the Idiosyncratic Volatility Puzzle
  • Author: STAMBAUGH, ROBERT F. ; YU, JIANFENG ; YUAN, YU
  • Subjects: Arbitrage ; Asymmetry ; Average ; Equity ; Investment policy ; Investors ; Rates of return ; Stock prices ; Stocks ; Studies ; Volatility
  • Is Part Of: The Journal of finance (New York), 2015-10, Vol.70 (5), p.1903-1948
  • Description: Buying is easier than shorting for many equity investors. Combining this arbitrage asymmetry with the arbitrage risk represented by idiosyncratic volatility (IVOL) explains the negative relation between IVOL and average return. The IVOL-return relation is negative among overpriced stocks but positive among underpriced stocks, with mispricing determined by combining 11 return anomalies. Consistent with arbitrage asymmetry, the negative relation among overpriced stocks is stronger, especially for stocks less easily shorted, so the overall IVOL-return relation is negative. Further supporting our explanation, high investor sentiment weakens the positive relation among underpriced stocks and, especially, strengthens the negative relation among overpriced stocks.
  • Publisher: Cambridge: Blackwell Publishing Ltd
  • Language: English
  • Identifier: ISSN: 0022-1082
    EISSN: 1540-6261
    DOI: 10.1111/jofi.12286
    CODEN: JLFIAN
  • Source: Alma/SFX Local Collection
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