Idiosyncratic volatility, turnover and the cross-section of stock returns: evidence from the Korean stock market
International Journal of Emerging Markets
ISSN: 1746-8809
Article publication date: 27 May 2022
Issue publication date: 12 December 2023
Abstract
Purpose
The authors aim to understand the driving forces behind the idiosyncratic volatility puzzle in the Korean stock market. The authors study the Korean stock market because previous works report a strong idiosyncratic volatility puzzle in Korea, and the market for the exchange-traded funds (ETFs) including low volatility ETFs has experienced drastic growth in Korea.
Design/methodology/approach
Using common stocks listed either on KOSPI or KOSDAQ over the period 1997–2016, the authors estimate idiosyncratic volatility using the Fama–French three-factor model. In addition, based on prior literature, the authors use turnover as a proxy for overvaluation. The authors then study the role of turnover in understanding the idiosyncratic volatility puzzle in Korea.
Findings
The authors find that turnover is highly associated with idiosyncratic volatility. Turnover is extremely large among firms with high idiosyncratic volatility and the puzzle disappears after we control for turnover, meaning that turnover subsumes the explanatory power of idiosyncratic volatility for equity returns. The authors also find underperformance of stocks with high turnover and high idiosyncratic volatility exclusively during earnings announcement periods. Overall, our finding implies that the puzzle arises since high idiosyncratic volatility stocks due to high turnover are overvalued and experience correction afterwards.
Originality/value
Literature has suggested explanations based on lottery preferences of investors and market frictions behind the idiosyncratic volatility puzzle. What makes our study distinct from previous work is that we find the role of turnover in understanding the idiosyncratic volatility puzzle using turnover measure as a proxy for overvaluation in the Korean stock market.
Keywords
Acknowledgements
This work was supported by the 2020 Yeungnam University Research Grant. Changjun Lee is grateful for the Hankuk University of Foreign Studies Research Fund.
Citation
Kim, J., Lee, C., Lee, W.-H., Ok, Y. and Truong, T.T.T. (2023), "Idiosyncratic volatility, turnover and the cross-section of stock returns: evidence from the Korean stock market", International Journal of Emerging Markets, Vol. 18 No. 12, pp. 6192-6213. https://doi.org/10.1108/IJOEM-09-2021-1499
Publisher
:Emerald Publishing Limited
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