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Dissecting the Idiosyncratic Volatility Puzzle: A Fundamental Analysis Approach

Author

Listed:
  • Zhaobo Zhu

    (Audencia Business School, Shenzhen University [Shenzhen])

  • Wenjie Ding

    (SYSU - Sun Yat-sen University [Guangzhou])

  • Yi Jin

    (MUST - Macau University of Science and Technology)

  • Dehua Shen

    (NKU - Nankai University)

Abstract

This paper argues fundamental information help resolve information uncertainty that leads to high idiosyncratic volatility premium. The IVOL-return relation is negative for stocks with poor fundamental strength but positive for stocks with strong fundamental strength. The arrival of fundamental news weakens the negative IVOL effect. Our findings are robust for alternative model specifications. Moreover, the negative IVOL effect dominates the positive IVOL effect due to arbitrage asymmetry that buying is easier than short selling stocks. Consistent with arbitrage asymmetry, the negative IVOL effect is stronger for stocks with low institutional ownership and following high investor sentiment. Overall, we provide a simple fundamental-based explanation for idiosyncratic volatility puzzle.

Suggested Citation

  • Zhaobo Zhu & Wenjie Ding & Yi Jin & Dehua Shen, 2023. "Dissecting the Idiosyncratic Volatility Puzzle: A Fundamental Analysis Approach," Post-Print hal-04194180, HAL.
    • Handle: RePEc:hal:journl:hal-04194180
    Note: View the original document on HAL open archive server: https://audencia.hal.science/hal-04194180
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    More about this item

    Keywords

    Idiosyncratic Volatility; Fundamental Strength; Arbitrage Asymmetry;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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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