No Low Volatility Effect in Low Volatility Market

Low volatility effect or low volatility anomaly has been well documented in recent empirical studies. Stocks with recent high volatility have shown low future average returns across the world. These findings were not only economically but also statistically meaningful. This paper tries to find more insight on the low volatility effect focusing on the relationship between low volatility effect and volatility level of equity market. Major findings in this paper are as follows: Low volatility effect exists in the Korean stock market. However, low volatility effect is not significant when volatility level of the stock market is low. The low volatility effect exists only in period of above average market volatility and disappears in times of below average market volatility which implies No low volatility effect in low volatility market . In regression analysis, we construct zero-cost portfolio which takes long position in the lowest volatility portfolio and short position in the highest volatility portfolio. Volatility level of stock market has a positive relationship with returns from zero-cost portfolio and explains abnormal returns uncaptured by 3 factor model.