Economic Uncertainty: A Key Factor to Understanding Idiosyncratic Volatility Puzzle

Abstract In this paper, we show that economic uncertainty is important to understanding the idiosyncratic volatility (IVOL) puzzle. We find that idiosyncratic volatility carries information related to the economic uncertainty. Uncertainty-averse investors potentially contribute to the IVOL puzzle. Negative IVOL strategy returns only show up after economic uncertainty raise. No robust and significant IVOL puzzle exists once we control stock exposure to economic uncertainty.