Revisiting the Idiosyncratic Volatility Puzzle and MAX Effect in European Equity Markets

Abstract: In light of traditional financial theory's argument that firm-specific risk should not impact future returns, the findings of the Idiosyncratic Volatility (IVOL) puzzle, as well as the Maximum Daily Returns (MAX) effect, have sparked a vibrant academic debate. Using data from January, 1993, to December, 2022, this paper presents European aggregate and country-level evidence at the intersection between the two asset pricing anomalies. For IVOL, we show a persistent significant anomaly across most European countries, which proves robust for different portfolio formation strategies and sorting controls, as well as the exclusion of microcaps. In line with existing literature, we confirm the mechanical relationship between the two anomalies for European data, however, we find evidence for bivariate MAX/IVOL sorts contradictory to Bali et al. (2011).