LIMIT-TO-ARBITRAGE FACTORS AND IVOL RETURNS PUZZLE: EMPIRICAL EVIDENCE FROM TAIWAN BEFORE AND DURING COVID-19

Khoa Dang Duong (), Qui Nhat Nguyen, Truong Vinh Le and Diep Nguyen
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Khoa Dang Duong: Faculty of Finance and Banking, Ton Duc Thang University, Ho Chi Minh City, Vietnam
Qui Nhat Nguyen: Faculty of Finance and Banking, Ton Duc Thang University, Ho Chi Minh City, Vietnam
Truong Vinh Le: Faculty of Finance and Banking, Ton Duc Thang University, Ho Chi Minh City, Vietnam

Annals of Financial Economics (AFE), 2021, vol. 16, issue 01, 1-18

Abstract: This paper examines the impacts of limit-to-arbitrage factors on the returns of the idiosyncratic volatility (IVOL) puzzle in Taiwan before and during the Covid-19 pandemic. Although various studies explore the relationship between stock returns and IVOL, the empirical findings are mixed. We are motivated by unique market microstructures in Taiwan, such as individual investors’ aggressive trading volume and low transaction costs in Taiwan, discouraging arbitrary trading activities. Our empirical results indicate a negative relationship between IVOL and stock returns by using data from the Taiwan stock market. However, the IVOL anomaly does not exist during the Covid-19 pandemic, even in the small stocks sample. Besides, our findings suggest that four proxies of limits-to-arbitrage, such as reversal, transaction costs, turnover and Amihud’s Illiquidity, have statistically significant impacts on the return of IVOL anomaly in Taiwan except for the pandemic period. Finally, our finding suggests that the stock turnover is the only limit-to-arbitrage factor that helps investors earn arbitrary profits during the COVID-19 period.

Keywords: Covid-19 pandemic; asset pricing; idiosyncratic volatility; limit-to-arbitrage; cross-sectional stock returns; illiquidity (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S2010495221500044

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