J.S. Doran, D. Jiang, and D.R. Peterson: Short-Sale Constraints and the Non-January Idiosyncratic Volatility Puzzle

November 7, 2007

Using event studies, we show that short-sale constraints play an important role in the negative relation between idiosyncratic volatility and stock returns. We explore three exogenous events that change short-sale constraints: the IPO lockup period expiration, option introduction, and the recent short-selling ban on financial stocks. Following mitigation of short-sale constraints from the first two events, high idiosyncratic volatility stocks underperform low volatility stocks in the short and long run, and are associated with higher abnormal trading volume.