Retail investor preferences and the idiosyncratic volatility puzzle

Julia Henker, Thomas Henker, Deborah Tan

Research output: Contribution to journalArticleResearchpeer-review


We explain 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 consequently 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 languageEnglish
Pages (from-to)45-53
Number of pages9
JournalAcademy of Taiwan Business Management Review
Issue number3
Publication statusPublished - 2014


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