Lottery Preferences and the Idiosyncratic Volatility Puzzle

59 Pages Posted: 7 Feb 2014 Last revised: 28 Jan 2018

See all articles by Doina Chichernea

Doina Chichernea

University of Denver - Reiman School of Finance

Haim Kassa

Miami University

Steve L. Slezak

University of Cincinnati - Department of Finance - Real Estate

Date Written: December 29, 2017

Abstract

We investigate the empirical implications of investors’ heterogeneous preferences for skewness with respect to the idiosyncratic volatility (IVOL) puzzle (the negative correlation between idiosyncratic volatility and mean returns). We show that the IVOL puzzle is stronger: (1) within those stocks held primarily by agents with preference for lottery-like payoffs and, (2) during economic downturns, when the demand for lottery-like payoffs is high. These results support recent theories that suggest lottery preferences may be a significant source of the IVOL puzzle.

Keywords: idiosyncratic volatility, skewness, lottery preferences, economic conditions.

JEL Classification: G11, G12

Suggested Citation

Chichernea, Doina and Kassa, Haim and Slezak, Steve L., Lottery Preferences and the Idiosyncratic Volatility Puzzle (December 29, 2017). Available at SSRN: https://ssrn.com/abstract=2391234 or http://dx.doi.org/10.2139/ssrn.2391234

Doina Chichernea

University of Denver - Reiman School of Finance ( email )

2101 S. University Blvd
Denver, CO 80208
United States

Haim Kassa (Contact Author)

Miami University ( email )

800 E. Main St
The Farmer School of Business
Oxford, OH 45056
United States
(513) 529-2057 (Phone)
(513) 556-4891 (Fax)

HOME PAGE: http://fsb.miamioh.edu/kassah

Steve L. Slezak

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States

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