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Korean J Financ Stud > Volume 49(6); 2020 > Article
Korean Journal of Financial Studies 2020;49(6):871-911.
DOI: https://doi.org/10.26845/KJFS.2020.12.49.6.871    Published online December 31, 2020.
The Effects of Investor Sentiment and Limits-to-Arbitrage on the Idiosyncratic Volatility Puzzle
Hoyoung Ryu1, Taehyuk Kim2, Daesung Jung3
1Lecturer, Pusan National University
2Emeritus Professor, Pusan National University
3Adjunct Professor, Pusan National University
투자자 심리와 차익거래 제약이 고유변동성 이상현상에 미치는 영향
류호영1, 김태혁2, 정대성3
1부산대학교 강사
2부산대학교 명예교수
3부산대학교 겸임교수
Correspondence:  Daesung Jung, Tel: +82-51-510-2562, Fax: +82-51-581-3144, 
Email: jungdaesung@pusan.ac.kr
Received: 24 September 2019   • Revised: 24 November 2020   • Accepted: 11 December 2020
Abstract
This study examined the effects of investor sentiment and limits-to-arbitrage on the idiosyncratic volatility (IVOL) puzzle in the Korean stock market. The IVOL portfolio analysis revealed that IVOL is negatively associated with stock returns. It indicates the existence of the IVOL puzzle in the Korean stock market. Additionally, the IVOL puzzle observed in the Korean stock market is time-varying. Therefore, this study analyzed whether the IVOL return premium becomes stronger due to investor sentiment and limits-to-arbitrage. According to the results, all the investor sentiment portfolios had a negative IVOL return premium regardless of whether investor sentiment was high or low, and no patterns of the IVOL puzzle due to investor sentiment were found. On the other hand, the IVOL puzzle is observed when limits-to-arbitrage were high as compared to when they were low. Furthermore, the higher the limits-to-arbitrage, the higher the negative IVOL return premium. These results suggest that the IVOL puzzle is caused by stocks with high limits-to-arbitrage and is intensified when limits-to-arbitrage are high.
Key Words: Idiosyncratic Volatility Puzzle, Investor Sentiment, Limits-to-Arbitrage, Time-Varying Idiosyncratic Volatility, Korean Stock Market


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