Strategies · Core
Idiosyncratic Volatility Strategy
Short high residual-vol names and long low residual-vol names — Ang et al.’s IVOL puzzle as a book.
Definition
Estimate residual volatility from a factor model over a short window (often a month of daily residuals). Long low IVOL, short high IVOL. High-IVOL names are lottery-like and have historically underperformed — after costs, the short is the hard part.
Why it matters
It sits next to low-vol and MAX. Microstructure and shorting costs eat the extreme short.
Case
A high-IVOL biotech that rips on a trial. The short book is a lottery ticket sold cheap until it is not.
How to read it
Factor model, window, and a liquidity filter. If the edge is only in unshortable names, you do not have a book.
Key papers
Landmark references with real publisher or arXiv links — not token-overlap noise.
- The Cross-Section of Volatility and Expected ReturnsAng, Hodrick, Xing, Zhang · 2006 · Journal of FinanceIVOL in the cross-section.
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