The idiosyncratic volatility anomaly: Corporate investment or investor mispricing? Articles uri icon

publication date

  • November 2015

start page

  • 224

end page

  • 238

volume

  • 60

international standard serial number (ISSN)

  • 0378-4266

electronic international standard serial number (EISSN)

  • 1872-6372

abstract

  • Most of the literature on the idiosyncratic volatility anomaly has focused on plausible explanations for it based on investor preferences, investor irrationality or market characteristics. Surprisingly, the role of asset-pricing models and firm characteristics in the estimation of idiosyncratic risk measures has been largely neglected. Our results suggest that investment and profitability, presumably driven by managers and therefore linked to idiosyncratic risk, are able to account for the anomaly in a cross-section of stock returns. Moreover, we show that this effect is independent and complementary to the effects related to investor preference for skewness. (C) 2015 Elsevier BM. All rights reserved.

keywords

  • idiosyncratic risk; corporate investment; investor mispricing; valuation theory; accruals; anomaly; profitability; stock returns; cross-section; expected returns; risk; equilibrium; persistence; information; sentiment; skewness; market