Extract: Recent research demonstrates a negative relation between idiosyncratic risk and future return for some stocks. We explain this market irregularity with a behavioral finance argument. We argue that high idiosyncratic volatility stocks present a preferred trading habitat for individual investors because of the lottery-type qualities of these stocks. Consequently, individuals overvalue these stocks, reducing future return levels. Our findings that the negative idiosyncratic volatility premium is concentrated in the portion of the market that is characterized by relatively high retail investor trading support our argument. Moreover, we find that the phenomenon is particularly strong for daily returns and realized volatility, the result, we contend, of the activities of individual day traders.
|Title of host publication||Proceedings of the 2012 Annual Meeting of the Academy of Behavioral Finance and Economics, September 18-21, 2012, NY, USA|
|Publisher||Academy of Behavioural Finance & Economics (ABF)|
|Number of pages||3|
|Publication status||Published - 2012|
|Event||The 2012 Annual Meeting of the Academy of Behavioral Finance & Economics - New York, New York, United States|
Duration: 18 Sep 2012 → 21 Sep 2012
|Conference||The 2012 Annual Meeting of the Academy of Behavioral Finance & Economics|
|Period||18/09/12 → 21/09/12|
Henker, J., Henker, T., & Tan, D. (2012). Realized idiosyncratic volatility and retail investors. In Proceedings of the 2012 Annual Meeting of the Academy of Behavioral Finance and Economics, September 18-21, 2012, NY, USA (pp. 63-65). Academy of Behavioural Finance & Economics (ABF).