3 years ago

The High Idiosyncratic Volatility Low Return Puzzle

The High Idiosyncratic Volatility Low Return Puzzle

What have we got? What

What have we got? What are we trying to get?• The highest ivol quintile contains two types of stocks:– A group of small, illiquid, low-priced stocks display strong reversal.– A group of relatively large and liquid stocks generates the puzzle.In particular, losing stocks in this group exhibit drift.• Work-in-progress:What explains low return of the second group?– Analysts forecasts dispersion and/or effects of corporate news5

Why is it interesting?• Two different views of the ivol effect:– Very robust - AHXZ– Not robust at all - Bali and Cakici (2008)Sensitive to weighting-scheme.Sensitive to data frequency used to estimate ivol.• Our goal is to explain both.Now we can explain the sensitivity results of Bali and Cakici.We are trying to explain how the second group generates the AHXZ finding.6

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