Abstract
AbstractWe investigate the empirical implications of investors’ heterogeneous preferences for skewness with respect to the idiosyncratic volatility (IVOL) puzzle, that is, the negative correlation between IVOL and mean returns. We show that the IVOL puzzle is stronger: (1) within stocks held primarily by agents with a preference for lottery‐like payoffs; and (2) during economic downturns, when the demand for lottery‐like payoffs is high. These results support recent theories that suggest lottery preferences could be a significant source of the IVOL puzzle.
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