Dissecting the Idiosyncratic Volatility Anomaly

The finding that stocks with high idiosyncratic volatility tend to have low future returns, as first documented in Ang, Hodrick, Xing, and Zhang (2006), has been dubbed as the idiosyncratic volatility anomaly in the finance literature. Several studies have since explored various potential explanations of the anomalous relation between idiosyncratic volatility and stock returns. Some studies even provided evidence that the relation may not be robust in certain stock samples. The purpose of this study is to examine the robustness of the idiosyncratic volatility anomaly with respect to two sample selection criteria: (a) penny stocks vs. non-penny stocks, and (b) common stocks vs. non-common stocks. The findings of our analysis not only provide further evidence for the robustness of the anomaly but more importantly highlight potential driving forces of the anomaly.