A Study on the Relationship between Idiosyncratic Volatility and Stock Returns in the Korean Stock Markets

Eom, Cheol Jun; Lee, Woo Baik; Park, Rae Soo; Chang, Uk; Park, Jong Won

Korean Journal of Financial Studies 2014;43(4):753-784.
Published online September 30, 2014.

Cheol Jun Eom, Woo Baik Lee, Rae Soo Park, Uk Chang, Jong Won Park

한국주식시장의 고유변동성 퍼즐에 대한 연구

엄철준, 이우백, 박래수, 장욱, 박종원

Abstract

The idiosyncratic volatility (IVOL) puzzle, as first documented in Ang et al. (2006), has received so much attention in the finance literature. We examine the IVOL puzzle in the Korean stock markets. We use monthly realized IVOL based on daily stock returns and conditional IVOL from EGARCH based on monthly stock returns. We find that stocks with recent past high IVOL have low future average returns in Korean stock markets after controlling for market beta, size and value factors. The negative relationship between IVOL and stock returns is significant and robust for controlling short-term reversal, momentum, trading volume turnover ratio, stock price level. This result saggests that the IVOL puzzle of Ang et al. (2006) exists and there are broad, not easily diversifiable factors in Korean stock markets. However, we can not find this IVOL puzzle in the up market period and January. In January high IVOL stocks on average outperform low IVOL stocks while in other months they underperform. And in up markets the negative relationship between IVOL and stock returns is not significant but it is very significant in down markets. These results mean that high IVOL stocks earn large negative returns when the market goes down and induce the IVOL puzzle in the Korean stock markets.

Key Words: 가격결정모형,고유변동성,고유변동성 퍼즐,주식수익률,한국자본시장,Asset Pricing Model,Idiosyncratic Volatility(IVOL),IVOL Puzzle,Korean Stock Markets,Stock Returns