Volatility and the Cross-Section of Equity Returns: The Role of Short-Selling Constraints
44 Pages Posted: 28 Apr 2020
Date Written: April 3, 2020
A number of papers document a strong negative relation between idiosyncratic volatility and risk-adjusted stock returns. Using IHS Markit data on indicative borrowing fees, we show that stocks with high idiosyncratic volatility are far more likely to be hard-to-borrow than stocks with low idiosyncratic volatility. When hard-to-borrow stocks are excluded, the relation between idiosyncratic volatility and stock returns disappears. The relation between idiosyncratic volatility and stocks returns is more accurately described as a relation between being hard-to-borrow and stock returns.
Keywords: Short Selling Fees, Idiosyncratic Volatility, Hard to Borrow Stocks
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