Idiosyncratic Volatility and Firm-Specific News: Beyond Limited Arbitrage
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.
Department of Finance
Original Publication Date
DOI of published version
UNI ScholarWorks, Rod Library, University of Northern Iowa
DeLisle, R. Jared; Mauck, Nathan; and Smedema, Adam R., "Idiosyncratic Volatility and Firm-Specific News: Beyond Limited Arbitrage" (2016). Faculty Publications. 998.