I am currently analyzing the IVOL puzzle and I find in a single sort that the higher the IVOL the lower the return. Additionally I do a double sort, first sorting on skew and then on IVOL. I find that after controlling for slew the IVOL puzzle disappears. After that I do another double sort, first sorting on return of the previous month and then on IVOL. Here also, the IVOL puzzle disappears.

Now I am wondering if it is the lottery preferences (investors seeking highly skewed stocks) that explain the IVOL puzzle or the return reversal?

Would it be now correct to do a Fama macbeth Regression ret ~ IVOL + RET(t-1)? Because this show me that only RET(t-1) has a significantly negative influence on returns.

  • $\begingroup$ If you do not get an answer here, there is a quatitative finance stack exchange site. $\endgroup$ – Brian Romanchuk Feb 10 '18 at 16:50

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