The timing of low-volatility strategy

Abstract

This study explores the role of investor attention impact on low-volatility strategy. Our evidence suggests that a low-volatility strategy for high investor attention stocks is more profitable than low investor attention stocks. Conditioned on high investor attention, the profitability of a low-volatility strategy significantly increases due to lower returns on higher idiosyncratic volatility stocks. Consistent with recent optimal beliefs theory, investors’ propensity for gambling-type strategies leads to negative returns with high idiosyncratic volatility stocks. Our results provide a behavioral support to explain the low-volatility strategy based on investors’ propensity to gamble.