• DOI:10.1016/J.JFINECO.2016.02.013
Corpus ID: 9880283

Have We Solved the Idiosyncratic Volatility Puzzle

@article{Hou2016HaveWS,
  title={Have We Solved the Idiosyncratic Volatility Puzzle},
  author={K. Hou and R. Loh},
  journal={Journal of Financial Economics},
  year={2016},
  volume={121},
  pages={167-194}
}

K. Hou, R. Loh

Published 2016

Economics

Journal of Financial Economics

We propose a simple methodology to evaluate a large number of potential explanations for the negative relation between idiosyncratic volatility and subsequent stock returns (the idiosyncratic volatility puzzle). Surprisingly, we find that many existing explanations explain less than 10% of the puzzle. On the other hand, explanations based on investors’ lottery preferences and market frictions show some promise in explaining the puzzle. Together, all existing explanations account for 29–54% of… CONTINUE READING

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