Approximate factor structures defined by (Chamberlain and Rotschild 1983) allow to test whether a
given quantitative firm characteristic (the nominal stock price in this paper) is a determinant of the
idiosyncratic volatility of stock returns. Our study of 8,000 U.S stocks over the period 1980-2014
shows that small price stocks exhibit a higher idiosyncratic volatility than large price stocks. This
relationship is persistent over time and robust to variations in the number of common factors of the
approximate factor structure. Moreover, this small price effect does not hide a small-firm effect
because it is still valid when we analyze the tercile of large firms. Our result confirms that small price
stocks have lottery-type characteristics and, therefore, it is not in line with the efficient market
hypothesis.