Abstract
We explore the negative relation between idiosyncratic volatility and
future stock returns observed by previous researchers. We argue that, based on
the observation described in prospect theory, retail investors prefer stocks with a
high level of idiosyncratic volatility and are subsequently willing to overpay for
those stocks. In support of our argument, we find that the negative
idiosyncratic-volatility return relation is present in the Australian market, and
that this relation is affected by the magnitude of retail trading. The relation is
particularly strong when returns and realized volatility are measured at a daily
frequency.
future stock returns observed by previous researchers. We argue that, based on
the observation described in prospect theory, retail investors prefer stocks with a
high level of idiosyncratic volatility and are subsequently willing to overpay for
those stocks. In support of our argument, we find that the negative
idiosyncratic-volatility return relation is present in the Australian market, and
that this relation is affected by the magnitude of retail trading. The relation is
particularly strong when returns and realized volatility are measured at a daily
frequency.
Original language | English |
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Pages | 1-55 |
Number of pages | 55 |
DOIs | |
Publication status | Published - 2009 |
Event | Financial Management Association 2009 Annual Meeting - Reno - Lake Tahoe, Nevada, United States Duration: 21 Oct 2009 → 24 Oct 2009 Conference number: 23rd |
Conference
Conference | Financial Management Association 2009 Annual Meeting |
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Abbreviated title | FMA Annual Meeting |
Country/Territory | United States |
City | Nevada |
Period | 21/10/09 → 24/10/09 |