Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/287140 
Year of Publication: 
2021
Citation: 
[Journal:] Review of Derivatives Research [ISSN:] 1573-7144 [Volume:] 24 [Issue:] 3 [Publisher:] Springer US [Place:] New York, NY [Year:] 2021 [Pages:] 197-220
Publisher: 
Springer US, New York, NY
Abstract: 
We establish a direct link between sophisticated investors in the option market, private stock market investors, and the idiosyncratic volatility (IVol) puzzle. To do so, we employ three option-based volatility spreads and attention data from Google Trends. In line with the IVol puzzle, the volatility spreads indicate that sophisticated investors indeed consider high-IVol stocks as being overvalued. Moreover, the option measures help to distinguish overpriced from fairly priced high-IVol stocks. Thus, these measures are able to predict the IVol puzzle's magnitude in the cross-section of stock returns. Further, we link the origin of the IVol puzzle to the trading activity of irrational private investors as the return predictability only exists among stocks that receive a high level of private investor attention. Overall, our joint examination of option and stock markets sheds light on the behavior of different investor groups and their contribution to the IVol puzzle. Thereby, our analyses support the intuitive idea that noise trading leads to mispricing, which is identified by sophisticated investors and exploited in the option market.
Subjects: 
Idiosyncratic volatility puzzle
Option-implied volatility spreads
Investor attention
JEL: 
G12
G14
G40
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.