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Economic uncertainty: A key factor to understanding idiosyncratic volatility puzzle

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  • Li, Yong
  • Mu, Yuandong
  • Qin, Tianyu

Abstract

In this paper, we show that economic uncertainty is important to understanding the idiosyncratic volatility (IVOL) puzzle. We find that idiosyncratic volatility carries information related to the economic uncertainty. Uncertainty-averse investors potentially contribute to the IVOL puzzle. Negative IVOL strategy returns only show up after economic uncertainty raise. No robust and significant IVOL puzzle exists once we control stock exposure to economic uncertainty.

Suggested Citation

  • Li, Yong & Mu, Yuandong & Qin, Tianyu, 2021. "Economic uncertainty: A key factor to understanding idiosyncratic volatility puzzle," Finance Research Letters, Elsevier, vol. 42(C).
    • Handle: RePEc:eee:finlet:v:42:y:2021:i:c:s1544612321000192
    DOI: 10.1016/j.frl.2021.101938
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    References listed on IDEAS

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    Cited by:

    1. Yao, Shouyu & Liu, Zezhong & Wang, Chunfeng & Palma, Alessia & Goodell, John W., 2024. "Is macroeconomic tail risk contagious to stock idiosyncratic risk?," Finance Research Letters, Elsevier, vol. 63(C).
    2. Iyer, Subramanian Rama & Simkins, Betty J., 2022. "COVID-19 and the Economy: Summary of research and future directions," Finance Research Letters, Elsevier, vol. 47(PB).

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    More about this item

    Keywords

    Economic uncertainty; IVOL puzzle; Asset pricing; Anomalies;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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