Doran, James and Jiang, Danling and Peterson, David (2007): Short-Sale Constraints and the Idiosyncratic Volatility Puzzle: An Event Study Approach.
This is the latest version of this item.
Download (352kB) | Preview
Using event studies, we show that short-sale constraints play an important role in the negative relation between idiosyncratic volatility and stock returns. We explore three exogenous events that change short-sale constraints: the IPO lockup period expiration, option introduction, and the recent short-selling ban on financial stocks. Following mitigation of short-sale constraints from the first two events, high idiosyncratic volatility stocks underperform low volatility stocks in the short and long run, and are associated with higher abnormal trading volume. Additionally, highly volatile financial firms experience greater price increases upon the short-sale ban enforcement and greater price drops upon the ban expiration.
|Item Type:||MPRA Paper|
|Institution:||Florida State University|
|Original Title:||Short-Sale Constraints and the Idiosyncratic Volatility Puzzle: An Event Study Approach|
|Keywords:||Idiosyncratic Volatility, Short-Sale Constraints, IPO Lockup, Option Introduction, Short-Sale Ban|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation
|Depositing User:||Danling Jiang|
|Date Deposited:||27. Mar 2009 03:22|
|Last Modified:||23. Mar 2015 05:25|
Ang, Andrew, Robert J. Hodrick, Yuhang Xing, and Xiaoyan Zhang, 2006, The Cross-Section of Volatility and Expected Returns, Journal of Finance 61, 259-299.
Ang, Andrew, Robert J. Hodrick, Yuhang Xing, and Xiaoyan Zhang, 2009, High Idiosyncratic Volatility and Low Returns: International and Further U.S. Evidence, Journal of Financial Economics 91, 1-23.
Asquith, Paul, Parag A. Pathak, and Jay R. Ritter, 2005, Short Interest, Institutional Ownership, and Stock Returns, Journal of Financial Economics 78, 243-276 forthcoming.
Atkins, Allen B., and Edward A. Dyl, 1997, Market Structure and Reported Trading Volume: NASDAQ versus the NYSE, Journal of Financial Research 20, 291-304.
Bai, Yang, Eric C. Chang, and JiangWang, 2006, Asset Prices Under Short-Sale Constraints, Working paper, MIT.
Bali, Turan G., and Nusret Cakici, 2007, Idiosyncratic Volatility and the Cross-Section of Expected Returns, Journal of Financial and Quantitative Analysis, forthcoming.
Barberis, Nicholas, and Ming Huang, 2001, Mental Accounting, Loss Aversion, and Individual Stock Returns, Journal of Finance 56, 1247-1292.
Barberis, Nicholas, and Wei Xiong, 2008, Realization Utility, Working paper, Princeton University.
Battalio, Robert, and Paul Schultz, 2006, Options and the Bubble, Journal of Finance 61, 2071-2102.
Blau, Benjamin M., 2008, Short-Sale Constraints, Listing Decisions, and Return Predictability around Option Introductions, Working paper, Brigham Young University.
Boehme, Rodney D., Bartley R. Danielsen, Praveen Kumar, and Sorin M. Sorescu, 2006, Idiosyncratic Risk and the Cross-Section of Stock Returns: Merton (1987) Meets Miller (1977), Working paper.
Boyer, Brian, Todd Mitton, and Keith Vorkink, 2008, Expected Idiosyncratic Skewness, Working paper, Brigham Young University.
Bradley, Daniel J., Bradford D. Jordan, Ha-Chin Yi, and Ivan C. Roten, 2001, Venture Capital and IPO Lockup Expiration: An Empirical Analysis, Journal of financial research 24, 465-492.
Brav, Alon, and Paul A. Gompers, 2003, The Role of Lockups in Initial Public Offerings, Review of Financial Studies 16, 1-29.
Campbell, John Y., Martin Lettau, Burton G. Malkiel, and Yexiao Xu, 2001, Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk, Journal of Finance 56, 1-43.
Chen, Joseph, Harrison Hong, and Jeremy C. Stein, 2002, Breadth of Ownership and Stock Returns, Journal of Financial Economics 66, 171-205.
Chua, Choong Tze, Jeremy Goh, and Zhe Zhang, 2007, Expected Volatility, Unexpected Volatility, and the Cross-section of Stock Returns, Journal of Financial Research forthcoming.
Cohen, Lauren, Kaul B. Diether, and Christopher J. Malloy, 2007, Supply and Demand Shifts in the Shorting Market, Journal of Finance 62, 2061-2096.
Daniel, Kent, David Hirshleifer, and Avanidhar Subrahmanyam, 1998, Investor Psychology and Security Market Under- and Overreactions, Journal of Finance 53, 1839-1886.
Daniel, Kent, David Hirshleifer, and Avanidhar Subrahmanyam, 2001, Overconfidence, Arbitrage, and Equilibrium Asset Pricing, Journal of Finance 56, 921-965.
Danielsen, Bartley R., and Sorin M. Sorescu, 2001, Why Do Option Introductions Depress Stock Prices? An Empirical Study of Diminishing Short-Sale Constraints, Journal of Financial and Quantitative Analysis 36, 451-484.
DeLong, J. Bradford, Andrei Shleifer, Lawrence Summers, and Robert J. Waldmann, 1990,
Noise Trader Risk in Financial Markets, Journal of Political Economy 98, 703-738.
Diamond, Douglas W., and Robert E. Verrecchia, 1987, Constraints on Short Selling and Asset Price Adjustment to Private Information, Journal of Financial Economics 18, 277- 311.
Diavatopoulos, Dean, James S. Doran, and David R. Peterson, 2008, The Information Content in Implied Idiosyncratic Volatility and the Cross-Section of Stock Returns: Evidence from the Option Markets, Journal of Futures Markets 28, 1013-1116.
Doran, James S., Danling Jiang, and Dave R. Peterson, 2008, Gambling in the New Year? The January Idiosyncratic Volatility Puzzle, Working paper, Florida State University.
Duan, Ying, Gang Hu, and R. David McLean, 2007, Costly Arbitrage and Idiosyncratic Risk: Evidence from Short Sellers, Working paper, Boston College and Unversity of Alberta.
Evans, Rich, Chris Geczy, David K. Musto, and Adam V. Reed, 2008, Failure is an Option: Impediments to Short Selling and Option Prices, Review of Financial Studies forthcoming.
Fama, Eugene F., 1998, Market Effciency, Long-Term Returns, and Behavioral Finance, Journal of Financial Economics 49, 283-306.
Fama, Eugene F., and Kenneth R. French, 1992, The Cross-Section of Expected Stock Returns, Journal of Finance 47, 427-465.
Fama, Eugene F., and Kenneth R. French, 1993, Common Risk Factors in the Returns on Stocks and Bonds, Journal of Financial Economics 33, 3-56.
Field, Laura C., and Gordon Hanka, 2001, The Expiration of IPO Share Lockups, Journal of finance 56, 471-500.
Figlewski, Stephen, and Gwendolyn P. Webb, 1993, Options, Short Sales, and Market Completeness, Journal of Finance 48, 761-777.
Fu, Fangjian, 2009, Idiosyncratic Risk and the Cross-Section of Expected Stock Returns, Journal of Financial Economics 91, 24-37.
Han, Bing, and Alok Kumar, 2008, Retail Clienteles and the Idiosyncratic Volatility Puzzle, Working paper, University of Texas at Ausin.
Harrison, J. M., and D. M. Kreps, 1978, Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations, Quarterly Journal of Economics 93, 323-336.
Hong, Harrison, Jose Scheinkman, and Wei Xiong, 2006, Asset Float and Speculative Bubbles, Journal of Finance 61, 1073-1117.
Huang, Wei, Qianqiu Liu, S. Ghon Rhee, and Liang Zhang, 2006, Return Reversals, Idiosyncratic Risk and Expected Returns, Working paper.
Jiang, George, Danielle Xu, and Tong Yao, 2007, The Information Content of Idiosyncratic Volatility, Journal of Financial and Quantitative Analysis forthcoming.
Jones, C., and M. Rhodes-Kropf, 2003, The Price of Diversifiable Risk in Venture Capital and Private Equity, Working paper, Columbia University.
Kapadia, Nishad, 2006, The Next Microsoft? Skewness, Idiosyncratic Volatility, and Expected Returns, Working paper.
Lamont, Owen, 2004, Short Sale Constraints and Overpricing, in Frank J. Fabozzi, eds.: The Theory and Practice of Short Selling: Risks, Rewards, Strategies (John Wiley & Sons, ).
Loughran, Tim, and Jay Ritter, 1997, The Operating Performance of Firms Conducting Seasoned Equity Offerings, Journal of Finance 52, 1823-1850.
Loughran, Tim, and Jay Ritter, 2000, Uniformly Least Powerful Tests of Market Effciency, Journal of Financial Economics 55, 361-389.
Malkiel, Burton G., and Yexiao Xu, 2006, Idiosyncratic Risk and Security Returns, Working paper.
Mayhew, Stewart, and Vassil Mihov, 2004, How Do Exchanges Select Stocks for Option Listing, Journal of Finance 59, 447-471.
Mayhew, Stewart, and Vassil Mihov, 2005, Short Sale Constraints, Overvaluation, and the Introduction of Options, Working paper, Texas Christian University.
Merton, Robert C., 1987, A Simple Model of Capital Market Equilibrium with Incomplete Information, Journal of Finance 42, 483-510.
Miller, Edward, 1977, Risk, Uncertainly and Divergence of Opinion, Journal of Finance 32, 1151-1168.
Miller, Edward M., 2001, Why the Low Returns to Beta and Other Forms of Risk, Journal of Portfolio Management pp. 40-55.
Nagel, Stefan, 2005, Short Sales, Institutional Investors, and The Cross-Section of Stock Returns, Journal of Financial Economics forthcoming.
Odean, Terrance, 1998, Volume, Volatility, Price and Profit When All Traders are Above Average, Journal of Finance 53, 1887-1934.
Ofek, Eli, and Matthew Richardson, 2003, DotCom Mania: The Rise and Fall of Internet Stock Prices, Journal of Finance 58, 1113-1137.
Ofek, Eli, Mathew Richardson, and Robert F. Whitelaw, 2004, Limited Arbitrage and Short Sale Restrictions: Evidence from The Options Market, Journal of Financial Economics 74, 305-342.
Scheinkman, Jose A., and Wei Xiong, 2003, Overconfidence and Speculative Bubbles, Journal of Political Economy 111, 1183-1219.
Schultz, Paul, 2003, Pseudo Market Timing and the Long-Run Underperformance of IPOs, Journal of Finance 58, 483-517.
Sharpe, William F., 1964, Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk, Journal of Finance 19, 425-442.
Shleifer, Andrei, and Robert Vishny, 1997, The Limits of Arbitrage, Journal of Finance 52, 35-55.
Sorescu, Sorin M., 2000, The Effect of Options on Stock Prices: 1973-1995, Journal of Finance 55, 487-514.
Spiegel, Matthew, and Xiaotong Wang, 2006, Cross-Sectional Variation in Stock Returns: Liquidity and Idiosyncratic Risk, Working paper, Yale University.
Xu, Jianguo, 2007, Price Convexity and Skewness, Journal of Finance 62, 2521-2552.
Available Versions of this Item
Short-Sale Constraints and the Non-January Idiosyncratic Volatility Puzzle. (deposited 22. Sep 2007)
- Short-Sale Constraints and the Idiosyncratic Volatility Puzzle: An Event Study Approach. (deposited 27. Mar 2009 03:22) [Currently Displayed]