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

See all articles by Jie Cao

Jie Cao

The Hong Kong Polytechnic University - School of Accounting and Finance

Tarun Chordia

Emory University - Department of Finance

Xintong Zhan

Department of Finance, School of Management, Fudan University

Date Written: November 23, 2020

Abstract

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

Cao, Jie and Chordia, Tarun and Zhan, Xintong, The Calendar Effects of the Idiosyncratic-Volatility Puzzle: A Tale of Two Days? (November 23, 2020). Management Science, Vol.67, 2021, Available at SSRN: https://ssrn.com/abstract=3659479

Jie Cao

The Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom, Kowloon
Hong Kong

HOME PAGE: http://sites.google.com/site/jiejaycao

Tarun Chordia

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Xintong Zhan (Contact Author)

Department of Finance, School of Management, Fudan University ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

HOME PAGE: http://sites.google.com/view/xintongzhan

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