Dissecting the idiosyncratic volatility anomaly |
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Affiliation: | 1. Universidad de los Andes, School of Management, Cll 21 # 1-20, Edificio Santo Domingo Bogotá, Colombia;2. Durham University Business School, Mill Hill Lane, Durham DH1 3LB, UK;3. University Carlos III- Department of Business Administration, C/ Madrid, 126, 28903 Getafe, Madrid, Spain |
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Abstract: | The idiosyncratic volatility (IVOL) anomaly, documented in Ang, et al. (2006), has garnered a great deal of attention in the literature. Yet questions remain regarding the robustness and pervasiveness of the IVOL anomaly, with a particular concern that the IVOL anomaly might simply be the manifestation of market microstructure effect. In this paper, we show that the IVOL anomaly is strong and pervasive after we exclude stocks most susceptible to market microstructure noise — such as microcap stocks, penny stocks, and stocks with strong short-term return reversal. These results are robust to equal-weighting or value-weighting stocks in the IVOL portfolios. Our findings suggest that rather than being the cause of the anomaly, market microstructure noise actually weakens the IVOL anomaly. |
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Keywords: | Idiosyncratic volatility anomaly Robustness Market microstructure effect Microcaps Penny stocks Stock return reversal |
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