volatility increases. The better-than-expected performance arises because unprofitable firms are distressed and volatile, their … equity resembles a call option on the assets, and call options value increases with volatility, all else fixed. Consistent … with this hypothesis, the profitability anomaly is stronger for distressed and volatile firms, and aggregate volatility …

of the stocks with high idiosyncratic volatility (high IVOL). An out-of-sample prediction of future profitability is …