The Calendar Effects of the Idiosyncratic Volatility Puzzle: A Tale of Two Days?

The idiosyncratic volatility (IVOL) anomaly exhibits strong calendar effects. The negative relation between IVOL and the next-month return obtains mainly in the third week of the month. The IVOL-return relation is generally negative on Mondays and positive on Fridays. However, the positive impact is absent on the third Friday because of selling pressure from stocks delivered at option expiration. This imbalance between the negative and positive returns during the third week of the month has a large impact on the IVOL-return relation. Removing the third Friday and subsequent Monday return reduces the monthly IVOL effect by at least 40%. This paper was accepted by Karl Diether, finance.

Daily Winners and Losers in the Korean 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.