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Korean J Financ Stud > Volume 47(3); 2018 > Article
Korean Journal of Financial Studies 2018;47(3):471-503.
DOI: https://doi.org/10.26845/KJFS.2018.06.47.3.471    Published online June 30, 2018.
Cross-Sectional Mispricing and Idiosyncratic Volatility : A New Approach
Cheoljun Eom
횡단면 주식가격오류와 고유변동성 : 새로운 접근법
엄철준
부산대학교
Abstract
This study investigates empirical evidence for a possible explanation of the idiosyncratic volatility puzzle by combining stock mispricing and arbitrage asymmetry using stock returns traded in KOSPI and KOSDAQ. For this purpose, a measure of cross-section mispricing is devised and two groups are categorized consisting respectively of overvalued and undervalued stocks. The main study results are as follows. Through statistical hypothesis testing, it is empirically proven that the devised method has a significant ability to classify overvalued and undervalued stocks using historical stock returns. The idiosyncratic puzzle observed in the Korean stock market is directly affected by mispricing groups, and the cause can be explained based on arbitrage asymmetry. In other words, the negative relationship between idiosyncratic volatility and expected return shows much stronger evidence in the group of overvalued stocks; however, this evidence is not confirmed in the group of undervalued stocks. These are not explained in the risk and return relations of traditional financial theory, but are explained on the basis of arbitrage asymmetry. In recent research trends to improve the explanatory power of expected returns’ anomalies based on the combination between mispricing and arbitrage asymmetry, the devised method that can determine the degree of mispricing is expected to be useful when observing anomalies of expected returns.
Key Words: 고유변동성 수수께끼,가격오류,시장이상현상,재정거래 비대칭성,횡단면분석,Idiosyncratic Volatility Puzzle,Mispricing,Market Anomaly,Arbitrage Asymmetry,Cross-sectional Regression
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