Articlegreen2018

Lottery preferences and the idiosyncratic volatility puzzle

Doina C. Chichernea · Haimanot Kassa · Steve L. Slezak

19 citations0/0 files storedEuropean Financial Management

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Financial Markets and Investment Strategies Decision-Making and Behavioral Economics Financial Risk and Volatility Modeling

Abstract

Abstract We investigate the empirical implications of investors’ heterogeneous preferences for skewness with respect to the idiosyncratic volatility (IVOL) puzzle, that is, the negative correlation between IVOL and mean returns. We show that the IVOL puzzle is stronger: (1) within stocks held primarily by agents with a preference for lottery‐like payoffs; and (2) during economic downturns, when the demand for lottery‐like payoffs is high. These results support recent theories that suggest lottery preferences could be a significant source of the IVOL puzzle.

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References

1993Common risk factors in the returns on stocks and bonds 1992The Cross-Section of Expected Stock Returns 1997On Persistence in Mutual Fund Performance 1973Risk, Return, and Equilibrium: Empirical Tests 2002Illiquidity and stock returns: cross-section and time-series effects 1996Multifactor Explanations of Asset Pricing Anomalies 1987A Simple Model of Capital Market Equilibrium with Incomplete Information 2003Liquidity Risk and Expected Stock Returns

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