Lottery mindset, mispricing and idiosyncratic volatility puzzle: Evidence from the Chinese stock market

In their working paper, Kumar, Ruenzi, and Ungeheuer (KRU) document that stocks ranked as daily winners or losers in the previous month underperform unranked stocks during the month after the ranking. KRU explain that the ranked stocks experience a large increase in investor attention, which leads to temporary overpricing and subsequent underperformance. Following KRU, we investigate whether the same effect exists in the Korean stock market and find a robust daily winners and losers effect. First, stocks that were both daily winners and losers in a given month underperform those that were neither daily winners nor losers during the following months. Second, stocks that were never a daily winner or loser during the previous month do not exhibit the idiosyncratic volatility puzzle or the MAX effect. Moreover, the underperformance of ranked stocks is robust after controlling for the idiosyncratic volatility and the MAX effect. We suggest that the overpricing caused by excessive attention to daily winners and losers may be the main driver of the idiosyncratic volatility puzzle and the MAX effect. Lastly, we find that retail investors buy daily winners and losers, while both institutional investors and foreign investors decrease trades in the ranked stocks.

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Heterogeneous beliefs and idiosyncratic volatility puzzle: evidence from China

China Finance Review International ◽

10.1108/cfri-07-2019-0128 ◽

2020 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Mao He ◽

Juncheng Huang ◽

Hongquan Zhu

Keyword(s):

Stock Returns ◽

Trading Volume ◽

Factor Model ◽

Heterogeneous Beliefs ◽

Idiosyncratic Volatility ◽

Chinese Stock Market ◽

Content Type ◽

Volatility Puzzle ◽

The Relationship ◽

Idiosyncratic Volatility Puzzle

PurposeThe purpose of our study is to explore the “idiosyncratic volatility puzzle” in Chinese stock market from the perspective of investors' heterogeneous beliefs. To delve into the relationship between idiosyncratic volatility and investors' heterogeneous beliefs, and uncover the ability of heterogeneous beliefs, as well as to explain the “idiosyncratic volatility puzzle”, we construct our study as follows.Design/methodology/approachOur study adopts the unexpected trading volume as proxies of heterogeneity, the residual of Fama–French three-factor model as proxies of idiosyncratic volatility. Portfolio strategies and Fama–MacBeth regression are used to investigate the relationship between the two proxies and stock returns in Chinese A-share market.FindingsInvestors' heterogeneous beliefs, as an intermediary variable, are positively correlated with idiosyncratic volatility. Meanwhile, it could better demonstrate the negative correlation between the idiosyncratic volatility and future stock returns. It is one of the economic mechanisms linking idiosyncratic volatility to subsequent stock returns, which can account for 11.28% of the puzzle.Originality/valueThe findings indicate that idiosyncratic volatility is significantly and positively correlated with heterogeneous beliefs and that heterogeneous beliefs are effective intervening variables to explain the “idiosyncratic volatility puzzle”.

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Research on Investment Preference and the MAX Effect in Chinese Stock Market

Journal of Systems Science and Information ◽

10.21078/jssi-2016-519-15 ◽

2016 ◽

Vol 4 (6) ◽

pp. 519-533

Author(s):

Xiaoju Gou ◽

Limei Bie

Keyword(s):

Stock Market ◽

Turnover Rate ◽

Negative Relationship ◽

Portfolio Analysis ◽

Idiosyncratic Volatility ◽

Chinese Stock Market ◽

Expected Return ◽

Cross Sectional ◽

Significant Negative Relationship ◽

Volatility Puzzle

AbstractInvestors prefer to invest the stocks with high history returns, which results in that the return of the stock with high history maximum return is often lower than that with low history maximum return, i.e., the MAX effect. We show that the MAX effect is also significant in China stock market, that is, there is a significant negative relationship between maximum return and expected return. We then conduct portfolio analysis and Fama-Macbeth cross-sectional regression and find that range of price and turnover rate can explain the MAX effect in a certain extent, idiosyncratic volatility and idiosyncratic skewness cannot explain the negative relationship between maximum return and expected return. Moreover, maximum return explains the idiosyncratic volatility puzzle partially.

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