【Topic】Arbitrage Asymmetry and the Idiosyncratic Volatility Puzzle

【Speaker】Jianfeng Yu，Associate Professor, University of Minnesota

【Time】13:45—15:15, 2013-12-26, Thursday

【Venue】Room 501, Weilun Building, Tsinghua SEM.

【Language】English

【Organizer】Department of Finance

【Target Audience】Faculty Members and Graduate Students

【Background Information】

Jianfeng Yu is an Associate Professor in Finance at the Carlson School of Management, University of Minnesota. He conducts both theoretical and empirical research on behavioral finance and macro finance. His research is published or forthcoming in academic journals such as Journal of Finance, Journal of Financial Economics, Journal of Monetary Economics, Management Science, and Review of Economic Dynamics. Yu holds a B.Sci. in Probability and Statistics from University of Science and Technology of China, an M.A. in Statistics from Yale University, and a Ph.D. in Finance from University of Pennsylvania. His research interests asset pricing in RBC models, behavioral asset pricing, asset pricing with frictions, contracts, and international markets.

【Abstract】

Short selling, as compared to purchasing, faces greater risks and other potential impediments. This arbitrage asymmetry explains the negative relation between idiosyncratic volatility (IVOL) and average return. The IVOL effect is negative among overpriced stocks but positive among underpriced stocks, with mispricing determined by combining 11 return anomalies. The negative effect is stronger, consistent with asymmetry in risks and other impediments inhibiting arbitrageurs in exploiting mispricing. Aggregating across all stocks therefore yields a negative relation, explaining the IVOL puzzle. Further supporting our explanation is a negative relation over time between the IVOL effect and investor sentiment, especially among overpriced stocks.