Robustness of Idiosyncratic Volatility Puzzle in the Korean Stock Market

Ok, Youngkyung; An, Seungcheol; Kim, Jungmu

doi:2018.47.4.635

Korean J Financ Stud > Volume 47(4); 2018 > Article

Korean Journal of Financial Studies 2018;47(4):635-671.
DOI: https://doi.org/10.26845/KJFS.2018.08.47.4.635 Published online August 31, 2018.

Robustness of Idiosyncratic Volatility Puzzle in the Korean Stock Market

Youngkyung Ok, Seungcheol An, Jungmu Kim

고유변동성 이상 현상의 강건성에 관한 검토

옥영경, 안승철, 김정무

영남대학교

Abstract

The study examines if idiosyncratic volatility (IVOL) puzzle reported in the Korean stock market is robust. While employing a common framework shared in the literature, we investigate how specific research design affects the robustness of the results. Specifically, we examine if the magnitude and statistical significance of average returns on long-short portfolios on a basis of idiosyncratic volatility are robust to different research designs: 1) definition of systematic risk, 2) period of estimation of volatility, 3) breakpoints, 4) weighting scheme, 5) sample period, 6) sample composition. We find that the research design affects the anomaly, except the definition of systematic risk. More specifically, the IVOL anomaly is robust only to the case where we use i) 3～12 month periods for the IVOL estimation, ii) KSE breakpoint for sorting, iii) value-weighting scheme for the portfolio return computation. In particular, breakpoint weakens the robustness the most. Constructing portfolios with equal market shares, we fail to find any condition under which abnormal return on the long-short portfolio is statistically significant. Contrary to previous studies, we argue that the IVOL puzzle is not robust in the Korean stock market.

Key Words: 고유변동성 이상 현상,주식 수익률 횡단면,한국 유가증권시장,FnGuide,이례현상,Idiosyncratic Risk Puzzle,Cross-Section,KOSPI,FnGuide,Anomaly