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J.S. Doran, D. Jiang, and D.R. Peterson, “Short-Sale Constraints and the Non-January Idiosyncratic Volatility Puzzle,” Munich Personal RePEc Archive, no. 4995, posted 7 November 2007).

J.S. Doran, D. Jiang, and D.R. Peterson, “Short-Sale Constraints and the Non-January Idiosyncratic Volatility Puzzle,” Munich Personal RePEc Archive, no. 4995, posted 7 November 2007).

Abstract: 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. Additionally, highly volatile financial firms experience greater price increases upon the short-sale ban enforcement and greater price drops upon the ban expiration.