Short-Sale Constraints and the Idiosyncratic Volatility Puzzle: An Event Study Approach

Doran, James and Jiang, Danling and Peterson, David (2007): Short-Sale Constraints and the Idiosyncratic Volatility Puzzle: An Event Study Approach.

Abstract

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
• Language: English
• 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

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