Faculty Publications

Title

Idiosyncratic Volatility and Firm-Specific News: Beyond Limited Arbitrage

Document Type

Article

Journal/Book/Conference Title

Financial Management

Volume

45

Issue

4

First Page

923

Last Page

951

Abstract

We examine the relation between idiosyncratic volatility and returns around news announcements. Mispricing is most likely to occur during news announcements. If idiosyncratic volatility generates a limit to arbitrage, then the negative relation between returns and news volatility should be stronger than the relation to nonnews volatility. Instead, we find nonnews volatility has a robust negative relation to returns and lacks key features expected if volatility were a reflection of limits to arbitrage. Pricing of nonnews volatility is related to lottery-like features of a stock's return. Our results suggest that volatility has a price effect beyond a limit to arbitrage.

Original Publication Date

12-1-2016

DOI of published version

10.1111/fima.12135

Repository

UNI ScholarWorks, Rod Library, University of Northern Iowa

Language

en

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