This paper examines the risk and profits of low volatility investing in the KOSDAQ market during the 2001-2017 period. Following Ang et al. (2006, 2009), we construct quintile portfolios based on idiosyncratic volatility of the Fama-French model, and analyze the long leg (the lowest quintile), the short leg (the highest volatility), and the long-short portfolio (low minus high). Main findings are as follows. First, the long-short portfolio earns 2.27% per month. Interestingly, this profitability mostly comes from the long leg that earns 1.36% (t-value: 2.62). The short leg earns only 0.91% per month statistically insignificantly. Second, while the returns on long or short legs have significant exposures on the three factors, the long-short portfolio returns are not affected by the market factor. Third, the short leg is much riskier than long-only or long-short portfolios in terms of MDD. While long-only (long-short) has an MDD of -57% (-49%), the MDD for the short leg is -83%. Our finding suggests that, unlike the KOSPI market, low volatility investing performs well in the KOSDAQ market.

JEL Classification: G12; G13

Keywords: idiosyncratic volatility puzzle, anomaly, KOSDAQ *