A Study on the Idiosyncratic Volatility of Low-priced and Lottery Type Stocks

A Study on the Idiosyncratic Volatility of Low-priced and Lottery Type Stocks

• David Lee, Stuart Management Science Ph.D. student

Abstract:

According to traditional pricing theory, the idiosyncratic volatility (IVOL) of a company, which is a diversifiable risk, should not be related to the return on stocks. However, many studies have observed the negative relationship between IVOL and stock return, and they report this phenomenon as an IVOL puzzle. This study observes the effect of stock prices on the relationship between IVOL and return. The main findings of this study are as follows. When the entire stock of the market is divided into five groups according to price, the IVOL puzzle is observed only in the cheapest stock group. This is considered to be a phenomenon caused by investors’ investment in the lottery tendency, not the basis of the company, and an empirical study is conducted.

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