Is the idiosyncratic volatility anomaly driven by the MAX or MIN effect? Evidence from the Chinese stock market

Abstract

The literature documents that the IVOL anomaly is subsumed by the MAX effect in U.S. and European stock market. Consistent with the literature, we find strong IVOL and MAX effects in the Chinese stock market. However, we show that the IVOL anomaly is not subsumed by the MAX effect, instead the MAX effect is subsumed by the IVOL anomaly. We interpret our findings as evidence that the IVOL anomaly in the Chinese stock market is beyond the effect of typical investor behavioral biases and there are stronger limits to arbitrage in the Chinese stock market due to unique institutional settings.