Idiosyncratic volatility in Korean stock market

Abstract

Much of the focus on the field of idiosyncratic volatility anomaly is concentrated towards investor sentiment or preference. This paper aims to explore whether investment and profitability measures based on corporate financial information can explain the idiosyncratic puzzle in Korean stock market. Precedent research has shown that Korean retail investors have strong propensity for lottery-like stocks and their behavior may be correlated to the anomaly. This research suggest that various investment and profitability measures fail to account for the idiosyncratic puzzle in the Korean stock market, and the anomaly is robust to size of market capitalization, value/growth, and time period. I also report that there seems to be a positive risk-premium of skewness, which is another evidence for investor's preference toward stocks with lottery-like payoffs.