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Review of Quantitative Finance and Accounting

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03-07-2021 | Original Research

The role of investor attention in idiosyncratic volatility puzzle and new results

Authors: Jungshik Hur, Vivek Singh

Published in: Review of Quantitative Finance and Accounting | Issue 1/2022

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Abstract

We find that stocks with low investor attention show a more substantial return-idiosyncratic volatility puzzle than stocks with high investor attention. We also document that high idiosyncratic volatility stocks with high investor attention at the end of the month when portfolios are formed are responsible for the puzzle, but they lose investor attention and have negative returns at the beginning of the next month. We further show that the idiosyncratic volatility puzzle exists only in the first half of the following month after portfolios are formed. It holds even for stocks with low investor attention.

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Other papers that provide evidence on undiversified portfolios held by individual investors are Odean (1999), and Mitton and Vorkink (2007). Calvet et al. (2007) present evidence on the under diversification of Swedish households.

Recently Kumar, Ruenzi, and Ungeheuer (2020), and Bucher (2017) have studied the relationship between idiosyncratic volatility anomaly and investor attention in a different settings. The subject of Kumar, Ruenzi, and Ungeheuer (2020) paper’s investigation is focused on winner and loser anomaly and finds results on idiosyncratic volatility anomaly and investor attention in additional analysis. Bucher (2017) examines investor attention and sentiments as risk factors. Our paper directly examines the relationship between idiosyncratic volatility anomalous relationship with stocks returns and investor attention.

This essentially removes all ADRs, SBIs, Units, REITS, closed-end funds and companies incorporated outside the U.S.A.

The Fama–French factors are obtained from Ken French’s data library available at: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

We thank an anonymous referee to point this out to us.

We thank the referee again for suggesting this robustness test to us.

This evidence is important because portfolios are formed on investor attention and idiosyncratic volatility independently.

While size and idiosyncratic skewness are negatively and positively related with investor attention respectively in the simple regression, size and idiosyncratic skewness are positively and negatively related with investor attention respectively in the multiple regression.

We don’t control for illiquidity and Scholes and Williams beta here because two firm characteristics are not significant in determining investor attention in Table 3.

Huang, Liu, Rhee, and Zhang (2010) find that in cross-sectional regressions of future returns of stocks on idiosyncratic volatility that control for previous month’s return, the coefficient on idiosyncratic volatility is no longer statistically significant.

We only report equal weighted returns for brevity because value weighted returns show similar results.

This data can be found at the following address: http://bear.warrington.ufl.edu/ritter/ipodata.htm

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Title: The role of investor attention in idiosyncratic volatility puzzle and new results
Authors: Jungshik Hur
Vivek Singh
Publication date: 03-07-2021
Publisher: Springer US
Published in: Review of Quantitative Finance and Accounting / Issue 1/2022
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-021-00999-w

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