Séminaire Finance Fabian HOLLSTEIN

Fabian HOLLSTEIN (Saarland University)
"Have We Solved the IVOL Puzzle ? Time-Series Evidence"

Abstract:
Considering the time-series dimension in addition to the cross-sectional dimension solves the idiosyncratic volatility (IVOL) puzzle. The previous literature relies mainly on a purely cross-sectional approach and shows that, although there are many candidate theories, the puzzling finding that high-IVOL stocks underperform low-IVOL stocks remains largely unexplained. We propose a novel panel-based approach that also takes into account variation of the aggregate level of the explanatory variables. The lion’s share of the explanatory power of most variables is driven by this time-series dimension. The most important explanatory variables are delay, the bid-ask spread, and aggregate financial uncertainty.