Solving the volatility puzzle with extreme returns

• Autor(a) principal: Falcão, Mariana Calapez Garcia
• Data de Publicação: 2019
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10400.14/29308
• topic: Idiosyncratic volatility; Cross-section of stock returns; Lottery-like payoffs; Extreme returns; Volatilidade idiossincrática; Cross-section do retorno de acções; Ativos tipo lotarias; Retornos extremos; Domínio/Área Científica::Ciências Sociais::Economia e Gestão

Motivated by the research of Ang, Xing, and Zhang (2006, 2009), which documents a negative relation between idiosyncratic volatility (IVOL) and future stocks returns, this analysis uses extreme daily returns to undo this effect and solve the recent found idiosyncratic volatility puzzle. This thesis uses data from the U.S stock market for the period from July 1962 to May 2018 to compute portfolios sorted on extreme daily returns and to run Fama MacBeth multivariate analysis. Through this analysis this study finds that maximum daily returns (MAX) are able to reverse the negative effect of idiosyncratic volatility. It also shows that when using both maximum and minimum daily returns (MIN), the effect of idiosyncratic volatility disappears completely. Finally, this study shows evidence that the idiosyncratic volatility effect diminishes in more recent years, specifically from 1991 to May 2018. Concluding that for the second period, both MIN and MAX individually do a good work at canceling the IVOL puzzle.