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Lottery preferences and the idiosyncratic volatility puzzle
Author(s) -
Chichernea Doina C.,
Kassa Haimanot,
Slezak Steve L.
Publication year - 2019
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12178
Subject(s) - lottery , volatility (finance) , economics , preference , econometrics , skewness , microeconomics , financial economics
We investigate the empirical implications of investors’ heterogeneous preferences for skewness with respect to the idiosyncratic volatility (IVOL) puzzle, that is, the negative correlation between IVOL and mean returns. We show that the IVOL puzzle is stronger: (1) within stocks held primarily by agents with a preference for lottery‐like payoffs; and (2) during economic downturns, when the demand for lottery‐like payoffs is high. These results support recent theories that suggest lottery preferences could be a significant source of the IVOL puzzle.