Volatility and the Cross-Section of Equity Returns: The Role of Short-Selling Constraints

44 Pages Posted: 28 Apr 2020

See all articles by Ruslan Goyenko

Ruslan Goyenko

McGill University - Desautels Faculty of Management

Paul Schultz

University of Notre Dame

Date Written: April 3, 2020

Abstract

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

Suggested Citation

Goyenko, Ruslan and Schultz, Paul, Volatility and the Cross-Section of Equity Returns: The Role of Short-Selling Constraints (April 3, 2020). Available at SSRN: https://ssrn.com/abstract=3567800 or http://dx.doi.org/10.2139/ssrn.3567800

Ruslan Goyenko (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Paul Schultz

University of Notre Dame ( email )

361 Mendoza College of Business
Notre Dame, IN 46556-5646
United States

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