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Decomposing the idiosyncratic volatility anomaly among euro area stocks

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  • Annaert, Jan
  • De Ceuster, Marc
  • Van Doninck, Freek

Abstract

We estimate the widely documented idiosyncratic volatility premium at a statistically and economically significant −7.27 basis points monthly among euro area stocks. Furthermore, we test the robustness of Hou and Loh (2016; HL) US findings on the decomposition of the premium in fractions related to lottery characteristics and market frictions. In line with HL, we are able to explain approximately 30% of the anomaly with a balanced contribution between the two competing explanations. The bid–ask spread plays a large role in explaining the anomaly in the euro area, while HL find no consistent evidence for its importance in the US.

Suggested Citation

  • Annaert, Jan & De Ceuster, Marc & Van Doninck, Freek, 2022. "Decomposing the idiosyncratic volatility anomaly among euro area stocks," Finance Research Letters, Elsevier, vol. 47(PB).
    • Handle: RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612322000010
    DOI: 10.1016/j.frl.2022.102672
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    More about this item

    Keywords

    Idiosyncratic volatility; Cross-section of stock returns; Lottery characteristics; Market frictions;
    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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