Finance Papers

Document Type

Journal Article

Date of this Version

10-2015

Publication Source

The Journal of Finance

Volume

70

Issue

5

Start Page

1903

Last Page

1948

DOI

10.1111/jofi.12286

Abstract

Buying is easier than shorting for many equity investors. Combining this arbitrage asymmetry with the arbitrage risk represented by idiosyncratic volatility (IVOL) explains the negative relation between IVOL and average return. The IVOL-return relation is negative among overpriced stocks but positive among underpriced stocks, with mispricing determined by combining 11 return anomalies. Consistent with arbitrage asymmetry, the negative relation among overpriced stocks is stronger, especially for stocks less easily shorted, so the overall IVOL-return relation is negative. Further supporting our explanation, high investor sentiment weakens the positive relation among underpriced stocks and, especially, strengthens the negative relation among overpriced stocks.

Copyright/Permission Statement

This is the peer reviewed version of the following article: STAMBAUGH, R. F., YU, J. and YUAN, Y. (2015), Arbitrage Asymmetry and the Idiosyncratic Volatility Puzzle. The Journal of Finance, 70: 1903–1948. doi:10.1111/jofi.12286, which has been published in final form at http://dx.doi.org/10.1111/jofi.12286. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving http://olabout.wiley.com/WileyCDA/Section/id-820227.html#terms

Embargo Date

9-3-2017

Share

COinS
 

Date Posted: 27 November 2017

This document has been peer reviewed.