The Robust Maximum Daily Return Effect as Demand for Lottery and Idiosyncratic Volatility Puzzle

We form indexes of overpriced and underpriced stocks by ranking stocks based on the disposition effect and anchoring bias. We document the negative relation between maximum daily return and future returns (MAX effect) is confined to overpriced stocks which make up about half the entire sample. We find that the average cross-sectional correlation between maximum daily return and idiosyncratic volatility is nearly 90%. Consistent with prior studies the idiosyncratic volatility puzzle disappears after controlling for the MAX effect. However, when using a sample with a $5 price breakpoint and controlling for overpriced stocks the idiosyncratic volatility puzzle and the MAX effect are economically and statistically significant

Aggregate Idiosyncratic Volatility, Dynamic Aspects of Loss Aversion, and Narrow Framing

We test the dynamic aspects of the loss aversion feature of Kahneman and Tversky (1979) and find that idiosyncratic volatility is negatively associated with unrealized gains of stock returns. Moreover, we show that this negative relationship is stronger for stocks with high individual investors\u27 holdings. Finally, we show that controlling for firm age as defined by Fink et al (2010) eliminates the significance of retail trading proportions as a driver of idiosyncratic volatility. These findings are robust to price, sentiment, and IPO dates. Bivariate vector auto-regression (VAR) confirms the causality of unrealized gains of stock returns on idiosyncratic volatility