Dissecting the Idiosyncratic Volatility Puzzle: A Fundamental Analysis Approach

This paper argues fundamental information help resolve uncertainty that leads to high idiosyncratic volatility premium. The IVOL-return relation is negative for stocks with poor strength but positive strong strength. arrival of news weakens the IVOL effect. Our findings are robust alternative model specifications. Moreover, effect dominates due arbitrage asymmetry buying easier than short selling stocks. Consistent asymmetry, stronger low institutional ownership and following investor sentiment. Overall, we provide a simple fundamental-based explanation puzzle.