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The Calendar Effects of the Idiosyncratic Volatility Puzzle: A Tale of Two Days?

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  • Jie Cao

    (Department of Finance, CUHK Business School, The Chinese University of Hong Kong, Hong Kong)

  • Tarun Chordia

    (Goizueta Business School, Emory University, Atlanta, Georgia, 30322)

  • Xintong Zhan

    (Department of Finance, CUHK Business School, The Chinese University of Hong Kong, Hong Kong; School of Management, Fudan University, Shanghai, China)

Abstract

The idiosyncratic volatility (IVOL) anomaly exhibits strong calendar effects. The negative relation between IVOL and the next-month return obtains mainly in the third week of the month. The IVOL-return relation is generally negative on Mondays and positive on Fridays. However, the positive impact is absent on the third Friday because of selling pressure from stocks delivered at option expiration. This imbalance between the negative and positive returns during the third week of the month has a large impact on the IVOL-return relation. Removing the third Friday and subsequent Monday return reduces the monthly IVOL effect by at least 40%.

Suggested Citation

  • Jie Cao & Tarun Chordia & Xintong Zhan, 2021. "The Calendar Effects of the Idiosyncratic Volatility Puzzle: A Tale of Two Days?," Management Science, INFORMS, vol. 67(12), pages 7866-7887, December.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:12:p:7866-7887
    DOI: 10.1287/mnsc.2020.3803
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    References listed on IDEAS

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