Is low-volatility investing sustainable in the SME stock market of Korea? A risk and return analysis

Abstract

This study examines the risks and profitability of low-volatility investing in the Korean Securities Dealers Automated Quotations (KOSDAQ) market during the 2001-2017 period. We chose the KOSDAQ market because noise trading is dominant and stocks are likely to be mispriced. We, therefore, expected that low-volatility investing could generate robust profits on the KOSDAQ market, unlike investing on the KOSPI market. Our empirical results support our prediction. Several risk metrics also indicated that this strategy can be implemented in practice. Furthermore, our findings suggest that the idiosyncratic volatility anomaly can be magnified by the mispricing effects of noise trading.