Premium
Retail Investors and the Idiosyncratic Volatility Puzzle: Evidence from the K orean Stock Market
Author(s) -
Kang Jangkoo,
Lee Eunmee,
Sim Myounghwa
Publication year - 2014
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/ajfs.12044
Subject(s) - volatility (finance) , stock (firearms) , arbitrage , monetary economics , empirical evidence , stock market , financial economics , economics , limits to arbitrage , business , econometrics , mechanical engineering , paleontology , philosophy , epistemology , horse , engineering , biology
If the trading of noise traders is highly correlated and arbitrage risk exists, stock prices can deviate from their fundamental value. In particular, due to the short‐selling impediments, stock prices tend to be overpriced. We hypothesize that the idiosyncratic volatility ( IVOL ) puzzle is due to this overpricing caused by noise traders that can be proxied by retail traders, and provide evidence supporting it. Our empirical findings are as follows. First, the IVOL puzzle is more prominent among stocks with a high retail trading proportion ( RTP ). Second, the negative relation between IVOL and stock returns is stronger following high retail sentiment. Finally, return reversals for stocks with high RTP and high IVOL are observed.