Dissecting the Idiosyncratic Volatility Anomaly

50 Pages Posted: 6 Nov 2020

See all articles by Linda H. Chen

Linda H. Chen

University of Idaho

George J. Jiang

Washington State University

Danielle Xu

Gonzaga University

Tong Yao

University of Iowa - Henry B. Tippie College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: September 30, 2020

Abstract

The idiosyncratic volatility (IVOL) anomaly, documented in Ang, Hodrick, Xing, and Zhang (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.

Keywords: Idiosyncratic volatility anomaly, Robustness, Market microstructure effect, Microcaps, Penny stocks, Stock return reversal

JEL Classification: G12, G14

Suggested Citation

Chen, Linda H. and Jiang, George and Xu, Danielle and Yao, Tong, Dissecting the Idiosyncratic Volatility Anomaly (September 30, 2020). Journal of Empirical Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3718794

Linda H. Chen

University of Idaho ( email )

Department of Accounting
College of Business and Economics
Moscow, ID 83944-3174
United States

George Jiang (Contact Author)

Washington State University ( email )

Department of Finance and Management Science
Carson College of Business
Pullman, WA 99-4746164
United States
509-3354474 (Phone)

HOME PAGE: http://directory.business.wsu.edu/bio.html?username=george.jiang

Danielle Xu

Gonzaga University ( email )

Spokane, WA 99258
United States

Tong Yao

University of Iowa - Henry B. Tippie College of Business ( email )

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