The alphabet and idiosyncratic volatility

Abstract

We find that stocks with names earlier in an alphabetic ordering exhibit greater idiosyncratic volatility. Stocks whose names are in the first 5% of an alphabetic ordering have 4.5% higher idiosyncratic volatility relative to other stocks. To address potential concerns about early-alphabet firms being different, we study name changes. Idiosyncratic volatility is 7% higher when a name change causes a stock to move into the first 5%. We attribute these results to noise traders being more active in early-alphabet stocks because of heuristic-based investing. In support of this explanation, we find that the effect is strongest during periods of high investor sentiment and among stocks with high turnover. Our results provide evidence that noise traders contribute to the idiosyncratic volatility of stocks.