Dissecting the Idiosyncratic Volatility Anomaly

Abstract

The idiosyncratic volatility anomaly, as first documented in Ang, Hodrick, Xing, and Zhang (2006), has received considerable attention in the literature. In this paper, we examine the pervasiveness of the anomaly in various stock samples and provide evidence towards distinguishing potential explanations. Our results show that the idiosyncratic volatility anomaly is a common stock phenomenon. It is rather robust once we exclude microcaps, as defined in Fama and French (2008), or penny stocks (with prices below $5), or the month of January, corroborating the findings in Doran, Jiang, and Peterson (2010). In addition, we show that the idiosyncratic volatility anomaly is not due to the market microstructure effect and cannot be explained by short-term stock return reversal.

Keywords: idiosyncratic volatility, stock returns, robustness, market microstructure effect

JEL Classification: G12, G14