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Korean Journal of Financial Studies 2014;43(3):573-603.
Published online June 30, 2014.
Low Volatility Anomaly and Its Profitability in Korean Stock Markets
Bong Chan Kho, Jin Woo Kim
저변동성 이상현상과 투자전략의 수익성 검증
고봉찬, 김진우
The low volatility anomaly is a phenomenon recently observed in many countries, where high volatility stocks underperform low volatility stocks in subsequent periods. In this paper, we examine whether such low volatility anomaly is found in Korean stock markets and what are the characteristics and causes of the anomaly. Using the KOSPI-listed stocks with at least 12 monthly returns from January 1990 to December2012, we show that the low volatility anomaly is found significantly in Korean stock market. Specifically, among quintile portfolios constructed each month based on idiosyncratic volatility of past stock returns, the buy-and-hold returns of the lowest volatility portfolio (P1) over the sample period amount to 218% after transaction costs, whereas those of the highest volatility portfolio (P5) reach -98%. The hedge portfolio of buying P1 and selling P5 each month earns significantly positive return of 1.57% per month on average after transaction costs. Especially, this low volatility anomaly is significant only for the period after 2000. In addition, regardless of the portfolio rebalancing period used and the holding period used, the hedge portfolio earns significantly positive excess returns consistently. From regression analyses to analyze the characteristics and causes of this anomaly, we find the underperformance of high volatility stocks is concentrated in stocks with high turnover and high skewness in their idiosyncratic returns. This implies that the anomaly could be related to the presence of noise traders who prefer lottery-like stocks with high volatility and high skewness, inducing an overvaluation bias that is corrected in subsequent periods to a fundamental value. In order to test this hypothesis, we estimate the expected skewness of idiosyncraticr eturns and find that the low volatility anomaly is found significantly only for stocks with high volatility and high expected skewness. This supports the hypothesis that the presence of noise traders preferring lottery-like stocks results in the low volatility anomaly in Korean stock market.
Key Words: 노이즈 투자자,변동성,왜도,저변동성 이상현상,행동재무학,Behavior Finance,Low Volatility Anomaly,Noise Traders,Skewness,Volatility

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