The Calendar Effects of the Idiosyncratic-Volatility Puzzle: A Tale of Two Days?
Management Science, Vol.67, 2021
59 Pages Posted: 14 Oct 2020 Last revised: 31 Jan 2022
Date Written: November 23, 2020
The idiosyncratic volatility (IVOL) anomaly exhibits strong calendar effects. The negative relation between IVOL and the next month return obtains mainly in the third week of the month. The IVOL-return relation is generally negative on Mondays and positive on Fridays. However, the positive impact is absent on the third Friday due to selling pressure from stocks delivered at option expiration. This imbalance between the negative and positive returns during the third week of the month has a large impact on the IVOL-return relation. Removing the third Friday and subsequent Monday return reduces the monthly IVOL effect by at least 40%.
Keywords: Idiosyncratic volatility, calendar effects, option expiration
JEL Classification: G11; G12; G41
Suggested Citation: Suggested Citation