Discussion
Arbitrage Asymmetry and the Idiosyncratic Volatility
Puzzle
by Stambaugh, Yu, and Yuan
Xiaoji Lin
Ohio State University
SFS Cavalcade
May 16, 2013
Summary of the paper
Arbitrage asymmetry is important to explain the IVol puzzle
Summary of the paper
Arbitrage asymmetry is important to explain the IVol puzzle
Why do we care?
Outline
1
Intuition and results
2
Comments
Outline
1
Intuition and results
Intuition 1
"We term arbitrage asymmetry— the observation that potential short sellers
wishing to exploit overpricing face impediments to arbitrage more than do
potential purchasers wishing to exploit underpricing."
Mispricing measure = average ranks of abnormal returns of 11 anomalies
Intuition 2
In this paper, the IVol e¤ect is
1
negative among overpriced stocks
2
but positive among underpriced stocks
3
aggregating yields a negative relation between IVol and returns
Intuition 2
In this paper, the IVol e¤ect is
1
negative among overpriced stocks
2
but positive among underpriced stocks
3
aggregating yields a negative relation between IVol and returns
Intuition 2
In this paper, the IVol e¤ect is
1
negative among overpriced stocks
2
but positive among underpriced stocks
3
aggregating yields a negative relation between IVol and returns
Results
Outline
2. Comments
Related literature
Explanation
expected idio skewness
coskewness
maximum daily return
retail trading proportion
one-month return reversal
illiquidity
uncertainty
short-sale constraints
…nancial distress
investor attention
growth options
average variance beta
earnings shocks
...
Paper
Boyer et al 2010
Chabi-Yo and Yang 2009
Bali et al 2011
Han and Kumar 2012
Fu 2009 and Huang et al 2009
Bali and Cakici 2008 and Han and Lesmond 2011
Johnson 2004
Boehme et al 2009 and George and Hwang 2011
Avramov et al 2012
George and Hwang 2011
Cao et al 2008 and Chen and Petkova 2012
Chen and Petkova 2012
Jiang et al 2009 and Wong 2011
...
Comment 1
The correlation between the mispricing measure and IVol
The correlation between the mispricing measure and the major existing
candiate variables, e.g., short-term reversal, earnings shocks, etc.
Direct evidence for artitrage asymmetry and IVol
e.g., analyst coverage, trading volume, etc.
Comment 1
The correlation between the mispricing measure and IVol
The correlation between the mispricing measure and the major existing
candiate variables, e.g., short-term reversal, earnings shocks, etc.
Direct evidence for artitrage asymmetry and IVol
e.g., analyst coverage, trading volume, etc.
Comment 1
The correlation between the mispricing measure and IVol
The correlation between the mispricing measure and the major existing
candiate variables, e.g., short-term reversal, earnings shocks, etc.
Direct evidence for artitrage asymmetry and IVol
e.g., analyst coverage, trading volume, etc.
Comment 2: power of the test
Hou and Loh (2012)
1
Start with Fama and Macbeth (1973) cross-sectional regressions of
individual month t stock returns on month t–1 IVOL
2
Decompose the t coe¢ cient into one or more components each
related to a candidate variable (e.g., skewness) and a residual
component.
3
The ratio of the component related to a particular candidate variable
to the original t coe¢ cient measures the fraction of the idiosyncratic
volatility puzzle that is captured by that variable
Comment 3: mispricing measure
Mispricing measure = average ranks of abnormal returns of 11 anomalies
An alternative factor model: Hou, Xue, and Zhang (2012)
Conclusion
Very interesting paper: Arbitrage asymmetry matters for the IVol puzzle
Would be nice to see additional robustness check