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Arbitrage asymmetry and the idiosyncratic volatility puzzle

Author: Robert F Stambaugh; Jianfeng Yu; Yu Yuan; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, ©2012.
Series: Working paper series (National Bureau of Economic Research), no. 18560.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Database:WorldCat
Summary:
Short selling, as compared to purchasing, faces greater risks and other potential impediments. This arbitrage asymmetry explains the negative relation between idiosyncratic volatility (IVOL) and average return. The IVOL effect is negative among overpriced stocks but positive among underpriced stocks, with mispricing determined by combining 11 return anomalies. The negative effect is stronger, consistent with  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Robert F Stambaugh; Jianfeng Yu; Yu Yuan; National Bureau of Economic Research.
OCLC Number: 819546373
Notes: Title from http://www.nber.org/papers/18560 viewed November 28, 2012.
"November 2012."
Description: 1 online resource (33 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 18560.
Responsibility: Robert F. Stambaugh, Jianfeng Yu, Yu Yuan.

Abstract:

Short selling, as compared to purchasing, faces greater risks and other potential impediments. This arbitrage asymmetry explains the negative relation between idiosyncratic volatility (IVOL) and average return. The IVOL effect is negative among overpriced stocks but positive among underpriced stocks, with mispricing determined by combining 11 return anomalies. The negative effect is stronger, consistent with asymmetry in risks and other impediments inhibiting arbitrageurs in exploiting overpricing. Aggregating across all stocks therefore yields a negative relation, explaining the IVOL puzzle. Further supporting our explanation is a negative relation over time between the IVOL effect and investor sentiment, especially among overpriced stocks.

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