This paper attributes the idiosyncratic volatility (IVOL) anomaly to investors’ recency bias and excess extrapolation.

The authors argue that investors overweight recent increases in volatility for high-IVOL stocks, reinforcing overvaluation.

To test this, they construct a recency-enhanced IVOL strategy that emphasizes recent volatility dynamics rather than static IVOL measures.

The results show that the recency-enhanced IVOL strategy delivers significant and robust profitability, while the non-recency component of the traditional IVOL strategy is largely unprofitable.

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