Mutual fund fire sales/purchases and idiosyncratic volatility
by Beichen Wang
THESIS
2014
M.Phil. Finance
viii, 38 pages : illustrations ; 30 cm
Abstract
This paper tests the behavioral explanation for idiosyncratic puzzle brought by Stambaugh, Yu,
and Yuan (2013). Idiosyncratic volatility represents arbitrage risk and show an asymmetric
effect in overpriced and underpriced stocks. I apply fire sale (purchase) by open-ended mutual
fund to proxy stock mispricing. Grouping by this exogenous mispricing, idiosyncratic volatility
shows positive effect in underpriced stocks and negative effect in overpriced stocks. I also look
into the interaction between stock idiosyncratic volatility and mutual funds trading behavior.
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