The Alphabet and Idiosyncratic Volatility

Abstract

We find that stocks with names earlier in the alphabetical ordering exhibit greater idiosyncratic volatility. Stocks in the first 5% of the cross-sectional alphabetical ordering have 4.5% higher idiosyncratic volatility relative to others. When focusing on firms that change names, we report that their idiosyncratic volatility is 7% higher during the period they belong to the first 5%. In accordance with a noise trading explanation, the effect is strongest during periods of high investor sentiment and among stocks with high turnover. We attribute the findings to increased noise trader activity in early alphabetical stocks stemming from heuristic-based investing, making arbitrage less efficient and thus increasing volatility.

Keywords: Volatility, Alphabet Bias, Noise Investors, Idiosyncratic Volatility

JEL Classification: G12, G41, G53