ScholarWorks@성균관대학교

초록

We contribute to the literature by introducing an explanation of the variation in idiosyncratic volatility (IVOL) anomaly return and its application to minimum-variance investing in the Canadian stock market. First, we find that the variation in minimum-variance exchange-traded fund excess return is better explained by the crowdedness of factor investing (and the following overpricing and market friction) than by the IVOL factor, which expands the state-of-the-art model. Second, we identify the crowdedness of factor investment by defining a novel time series indicator. Our indicator has a high predictive power for future factor returns and for the IVOL factor. Third, using the indicator and proxy for leverage constraint, we suggest a strategy of rotation between the Canadian minimum-variance exchange-traded fund portfolio and the Canadian stock market portfolio. This rotation strategy shows an excess compound annual growth rate that is more than 1% higher than the ex post high-performing spread between the two assets and is robust to high transaction costs. The long-only strategy is also considered to have a moderate index outperformance, enabling more practical implementation.

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