{"id":37307,"date":"2025-05-28T20:30:00","date_gmt":"2025-05-28T12:30:00","guid":{"rendered":"https:\/\/www.tejwin.com\/?post_type=insight&#038;p=37307"},"modified":"2026-01-13T14:24:37","modified_gmt":"2026-01-13T06:24:37","slug":"factor-strategy-idiosyncratic-volatility","status":"publish","type":"insight","link":"https:\/\/www.tejwin.com\/en\/insight\/factor-strategy-idiosyncratic-volatility\/","title":{"rendered":"Factor Strategy \u2013 Idiosyncratic Volatility | Part 2\u00a0"},"content":{"rendered":"\n<figure class=\"wp-block-image size-large is-resized\"><img fetchpriority=\"high\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/\u5b98\u7db2_factor-\u7cfb\u5217_ivol\u7b56\u7565-1024x576.png\" alt=\"\" class=\"wp-image-37312\" style=\"width:841px;height:auto\" srcset=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/\u5b98\u7db2_factor-\u7cfb\u5217_ivol\u7b56\u7565-1024x576.png 1024w, https:\/\/www.tejwin.com\/wp-content\/uploads\/\u5b98\u7db2_factor-\u7cfb\u5217_ivol\u7b56\u7565-300x169.png 300w, https:\/\/www.tejwin.com\/wp-content\/uploads\/\u5b98\u7db2_factor-\u7cfb\u5217_ivol\u7b56\u7565-150x84.png 150w, https:\/\/www.tejwin.com\/wp-content\/uploads\/\u5b98\u7db2_factor-\u7cfb\u5217_ivol\u7b56\u7565-768x432.png 768w, https:\/\/www.tejwin.com\/wp-content\/uploads\/\u5b98\u7db2_factor-\u7cfb\u5217_ivol\u7b56\u7565-1536x864.png 1536w, https:\/\/www.tejwin.com\/wp-content\/uploads\/\u5b98\u7db2_factor-\u7cfb\u5217_ivol\u7b56\u7565.png 1920w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69f0e5e3c5215\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"ez-toc-cssicon\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69f0e5e3c5215\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tejwin.com\/en\/insight\/factor-strategy-idiosyncratic-volatility\/#Introduction\" >Introduction&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tejwin.com\/en\/insight\/factor-strategy-idiosyncratic-volatility\/#Strategy_Construction_Backtesting\" >Strategy Construction &amp; Backtesting&nbsp;&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tejwin.com\/en\/insight\/factor-strategy-idiosyncratic-volatility\/#Single-Factor_Sorting_Strategies\" >Single-Factor Sorting Strategies&nbsp;<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tejwin.com\/en\/insight\/factor-strategy-idiosyncratic-volatility\/#Insights\" >Insights&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tejwin.com\/en\/insight\/factor-strategy-idiosyncratic-volatility\/#Filter-Enhanced_Momentum_Strategies\" >Filter-Enhanced Momentum Strategies<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tejwin.com\/en\/insight\/factor-strategy-idiosyncratic-volatility\/#Interpretation\" >Interpretation&nbsp;<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tejwin.com\/en\/insight\/factor-strategy-idiosyncratic-volatility\/#Conclusion\" >Conclusion&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.tejwin.com\/en\/insight\/factor-strategy-idiosyncratic-volatility\/#%F0%9F%92%BC_Empower_Your_Quant_Strategy_with_TEJ\" >\ud83d\udcbc Empower Your Quant Strategy with TEJ&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.tejwin.com\/en\/insight\/factor-strategy-idiosyncratic-volatility\/#Further_Reading\" >Further Reading:<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Introduction\"><\/span><strong>Introduction&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Building on the statistical foundation presented in <strong><a href=\"https:\/\/www.tejwin.com\/en\/?post_type=insight&amp;p=35319\" data-type=\"link\" data-id=\"https:\/\/www.tejwin.com\/en\/?post_type=insight&amp;p=35319\">Part 1<\/a>,<\/strong> this article explores how Idiosyncratic Volatility (IVOL) can be effectively applied in investment strategy design. We present two categories of approaches: a single-factor sorting model and a set of filter-enhanced momentum strategies. Through robust backtesting across two decades of Taiwan stock market data, we demonstrate how IVOL can improve risk-adjusted performance when used as a portfolio filter\u2014especially when combined with momentum or dividend-based signals.&nbsp;<\/p>\n\n\n\n<p class=\"has-background has-medium-font-size has-mobile-text-align-center\" style=\"background-color:#ffe9ae\">\ud83d\udc49  <a href=\"https:\/\/www.tejwin.com\/en\/insight\/factor-research-idiosyncratic-volatility\/\" data-type=\"link\" data-id=\"https:\/\/www.tejwin.com\/en\/insight\/factor-research-idiosyncratic-volatility\/\">Part 1\uff1aFactor Research\uff0dIdiosyncratic Volatility<\/a><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Strategy_Construction_Backtesting\"><\/span><strong>Strategy Construction &amp; Backtesting&nbsp;&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Building on the earlier analysis, we now evaluate IVOL\u2019s practical investment applications. Two categories of strategies are tested:&nbsp;<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><strong>Filter-Enhanced Momentum Strategies<\/strong> \u2013 incorporating IVOL and\/or DP as <strong>pre-filters<\/strong> to refine the MOM52WH signal.&nbsp;<\/li>\n\n\n\n<li><strong>Single-Factor Sorting Strategies<\/strong> \u2013 directly using IVOL, dividend yield (DP), or momentum (MOM52WH) as the basis for monthly stock selection;&nbsp;<\/li>\n<\/ol>\n\n\n\n<p>Backtests are conducted over <strong>Jan 2005 \u2013 Mar 2025<\/strong>, rebalanced monthly, with an initial capital of NT$10 million allocated <strong>equally<\/strong> across 50 selected stocks.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.tejwin.com\/en\/news\/factor-library\/\"><img decoding=\"async\" width=\"1024\" height=\"107\" src=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/CTA_Factor-Library-1-1024x107.png\" alt=\"\" class=\"wp-image-35334\" srcset=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/CTA_Factor-Library-1-1024x107.png 1024w, https:\/\/www.tejwin.com\/wp-content\/uploads\/CTA_Factor-Library-1-300x31.png 300w, https:\/\/www.tejwin.com\/wp-content\/uploads\/CTA_Factor-Library-1-150x16.png 150w, https:\/\/www.tejwin.com\/wp-content\/uploads\/CTA_Factor-Library-1-768x80.png 768w, https:\/\/www.tejwin.com\/wp-content\/uploads\/CTA_Factor-Library-1-1536x160.png 1536w, https:\/\/www.tejwin.com\/wp-content\/uploads\/CTA_Factor-Library-1.png 1920w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/a><\/figure>\n\n\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Single-Factor_Sorting_Strategies\"><\/span><strong>Single-Factor Sorting Strategies<\/strong>&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Each month, stocks are ranked by one of the following factors, and the <strong>top 50<\/strong> are selected:&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>IVOL<\/strong>: bottom 50 (lowest volatility)&nbsp;<\/li>\n\n\n\n<li><strong>MOM52WH<\/strong>: top 50 stocks near 52-week highs&nbsp;<\/li>\n\n\n\n<li><strong>DP<\/strong>: top 50 by cash dividend yield&nbsp;<\/li>\n<\/ul>\n\n\n\n<p class=\"has-background\" style=\"background-color:#ffe9ae\"><em>\ud83d\udccc All data and factors are sourced from the <strong>TEJ Factor Library<\/strong>, which enables clean monthly signal construction and portfolio simulation.&nbsp;<\/em><\/p>\n\n\n\n<p><strong>Table 1: Performance of Single-Factor Strategies<\/strong>\u00a0<\/p>\n\n\n\n<p><em>Benchmark: TAIEX Total Return Index, Jan 2005 \u2013 Mar 2025<\/em>)&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-background has-fixed-layout\" style=\"background-color:#ffe9ae\"><thead><tr><th><strong>Metric<\/strong>&nbsp;<\/th><th class=\"has-text-align-right\" data-align=\"right\"><strong>IVOL<\/strong>&nbsp;<\/th><th class=\"has-text-align-right\" data-align=\"right\"><strong>MOM52WH<\/strong>&nbsp;<\/th><th class=\"has-text-align-right\" data-align=\"right\"><strong>DP<\/strong>&nbsp;<\/th><th class=\"has-text-align-right\" data-align=\"right\"><strong>Benchmark<\/strong>&nbsp;<\/th><\/tr><\/thead><tbody><tr><td>Annual Return&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">3.57%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\"><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>13.40%<\/strong>\u00a0<\/mark><\/td><td class=\"has-text-align-right\" data-align=\"right\">5.93%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">10.41%&nbsp;<\/td><\/tr><tr><td>Cumulative Return&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">99.93%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">1099.27%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">211.92%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">607.56%&nbsp;<\/td><\/tr><tr><td>Annual Volatility&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\"><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>7.94%<\/strong>\u00a0<\/mark><\/td><td class=\"has-text-align-right\" data-align=\"right\">12.27%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">12.96%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">18.02%&nbsp;<\/td><\/tr><tr><td>Sharpe Ratio&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">0.482&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\"><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>1.087\u00a0<\/strong><\/mark><\/td><td class=\"has-text-align-right\" data-align=\"right\">0.510&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">0.640&nbsp;<\/td><\/tr><tr><td>Sortino Ratio&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">0.635&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\"><strong><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">1.490\u00a0<\/mark><\/strong><\/td><td class=\"has-text-align-right\" data-align=\"right\">0.670&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">0.887&nbsp;<\/td><\/tr><tr><td>Max Drawdown&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">-38.72%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">-37.70%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">-50.49%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">-56.02%&nbsp;<\/td><\/tr><tr><td>Alpha&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">-0.001&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">0.082&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">0.002&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">\u2013&nbsp;<\/td><\/tr><tr><td>Beta&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">0.343&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">0.470&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">0.559&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">\u2013&nbsp;<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><strong>Figure 2: Cumulative Returns of Single-Factor Strategies<\/strong>&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"495\" src=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/ivol_5-1024x495.png\" alt=\"\" class=\"wp-image-37314\" srcset=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/ivol_5-1024x495.png 1024w, https:\/\/www.tejwin.com\/wp-content\/uploads\/ivol_5-300x145.png 300w, https:\/\/www.tejwin.com\/wp-content\/uploads\/ivol_5-150x73.png 150w, https:\/\/www.tejwin.com\/wp-content\/uploads\/ivol_5-768x371.png 768w, https:\/\/www.tejwin.com\/wp-content\/uploads\/ivol_5-1536x742.png 1536w, https:\/\/www.tejwin.com\/wp-content\/uploads\/ivol_5.png 1920w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Insights\"><\/span><strong>Insights<\/strong>&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>IVOL alone provides limited return<\/strong> (3.57%), but its <strong>low volatility (7.94%) and low beta (0.34)<\/strong> make it suitable as a <strong>defensive anchor<\/strong> in portfolio construction.&nbsp;<\/li>\n\n\n\n<li><strong>MOM52WH<\/strong> delivers the <strong>highest alpha and Sharpe ratio<\/strong>, confirming momentum\u2019s strength in Taiwan.&nbsp;<\/li>\n\n\n\n<li><strong>DP strategy<\/strong> shows moderate returns but high drawdowns\u2014indicating dividend stocks are not always stable.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>\ud83d\udca1 Conclusion: IVOL is <strong>not ideal as a standalone alpha factor<\/strong>, but it has potential when used in combination with other signals for <strong>risk control<\/strong>.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Filter-Enhanced_Momentum_Strategies\"><\/span><strong>Filter-Enhanced Momentum Strategies<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>To improve momentum strategies, we apply IVOL and\/or DP as <strong>filters<\/strong> before ranking by MOM52WH:&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>IVOL Filter<\/strong>: exclude top 50% IVOL stocks, then select top 50 MOM52WH.&nbsp;<\/li>\n\n\n\n<li><strong>DP Filter<\/strong>: exclude bottom 50% dividend yield stocks, then select top MOM52WH.&nbsp;<\/li>\n\n\n\n<li><strong>IVOL + DP Filter<\/strong>: exclude both high-IVOL and low-DP stocks, then select MOM52WH top 50.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>This approach reflects prior findings\u2014high-IVOL stocks often have low dividend yield and poor return quality.&nbsp;<\/p>\n\n\n\n<p><strong>Table 3: Performance of Filter-Enhanced Momentum Strategies<\/strong>&nbsp;(<em>Jan 2005 \u2013 Mar 2025<\/em>)&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-background\" style=\"background-color:#ffe9ae\"><tbody><tr><td><strong>Metric<\/strong>&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\"><strong>MOM52WH<\/strong>&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\"><strong>+ IVOL Filter<\/strong>&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\"><strong>+ DP Filter<\/strong>&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\"><strong>+ IVOL &amp; DP Filters<\/strong>&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\"><strong>Benchmark<\/strong>&nbsp;<\/td><\/tr><tr><td>Annual Return&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">13.40%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">12.93%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">15.23%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\"><strong>15.44%<\/strong>&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">10.41%&nbsp;<\/td><\/tr><tr><td>Cumulative Return&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">1099.27%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">1004.23%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">1542.76%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\"><strong>1603.16%<\/strong>&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">607.56%&nbsp;<\/td><\/tr><tr><td>Annual Volatility&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">12.27%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">8.79%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">9.50%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\"><strong>8.68%<\/strong>&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">18.02%&nbsp;<\/td><\/tr><tr><td>Sharpe Ratio&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">1.087&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">1.428&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">1.540&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\"><strong>1.697<\/strong>&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">0.640&nbsp;<\/td><\/tr><tr><td>Sortino Ratio&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">1.490&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">1.964&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">2.123&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\"><strong>2.346<\/strong>&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">0.887&nbsp;<\/td><\/tr><tr><td>Max Drawdown&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">-37.70%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">-37.81%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">-36.75%&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\"><strong>-36.72%<\/strong>&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">-56.02%&nbsp;<\/td><\/tr><tr><td>Alpha&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">0.082&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">0.084&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">0.103&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\"><strong>0.108<\/strong>&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">\u2013&nbsp;<\/td><\/tr><tr><td>Beta&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">0.470&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">0.390&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">0.418&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\"><strong>0.389<\/strong>&nbsp;<\/td><td class=\"has-text-align-right\" data-align=\"right\">\u2013&nbsp;<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><strong>Figure 4: Cumulative Returns of Filtered Strategies<\/strong>&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"495\" src=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/ivol_6-1024x495.png\" alt=\"\" class=\"wp-image-37316\" srcset=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/ivol_6-1024x495.png 1024w, https:\/\/www.tejwin.com\/wp-content\/uploads\/ivol_6-300x145.png 300w, https:\/\/www.tejwin.com\/wp-content\/uploads\/ivol_6-150x73.png 150w, https:\/\/www.tejwin.com\/wp-content\/uploads\/ivol_6-768x372.png 768w, https:\/\/www.tejwin.com\/wp-content\/uploads\/ivol_6-1536x743.png 1536w, https:\/\/www.tejwin.com\/wp-content\/uploads\/ivol_6.png 1920w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Interpretation\"><\/span><strong>Interpretation<\/strong>&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Filtering by <strong>IVOL reduces volatility significantly<\/strong>, with only slight impact on return.&nbsp;<\/li>\n\n\n\n<li><strong>DP filter improves both return and Sharpe ratio<\/strong>, suggesting dividend yield complements momentum well.&nbsp;<\/li>\n\n\n\n<li>The <strong>IVOL + DP filter strategy performs best overall<\/strong>, combining strong returns with lower risk and minimal drawdown.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>\ud83d\udccc This validates IVOL\u2019s value as a <strong>risk management filter<\/strong>, especially when paired with alpha-generating signals like momentum.&nbsp;<\/p>\n\n\n\n<p><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span><strong>Conclusion<\/strong>&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>This study examines the validity of <strong>Idiosyncratic Volatility (IVOL)<\/strong> as an investment factor in Taiwan\u2019s stock market. After reviewing theoretical foundations and prior research, we first confirmed the presence of the <strong>low-volatility anomaly<\/strong> in Taiwan. We then analyzed the cross-sectional relationship between IVOL and future returns.&nbsp;<\/p>\n\n\n\n<p>The factor analysis revealed a <strong>stable and significant negative relationship<\/strong> between IVOL and subsequent stock performance. However, when IVOL was used alone to construct a single-factor strategy, the resulting returns were relatively weak. In contrast, using IVOL as a <strong>risk filter<\/strong> in combination with momentum factors led to substantial improvements in risk-adjusted returns, suggesting that <strong>excluding high-IVOL stocks<\/strong> may enhance overall portfolio quality.&nbsp;<\/p>\n\n\n\n<p>Overall, IVOL may not be suitable as a <strong>standalone selection factor<\/strong>, but it holds practical value when used as a <strong>risk screening condition<\/strong>. This conclusion aligns with the view that <strong>low-volatility anomalies are driven by the underperformance of high-risk stocks<\/strong>, rather than the superior returns of low-risk stocks.&nbsp;<\/p>\n\n\n\n<p>In practice, IVOL supports not only return enhancement, but also <strong>risk control and portfolio construction<\/strong> in a multi-factor setting.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"%F0%9F%92%BC_Empower_Your_Quant_Strategy_with_TEJ\"><\/span><strong>\ud83d\udcbc Empower Your Quant Strategy with TEJ<\/strong>&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The <strong>TEJ Factor Library<\/strong> provides over 100 standardized alpha factors\u2014including IVOL, momentum, valuation, and quality\u2014built with <strong>point-in-time methodology<\/strong> for clean backtests. Combined with <strong>TEJ Market &amp; Financial Data<\/strong>, it enables seamless:&nbsp;<\/p>\n\n\n\n<p class=\"has-pale-ocean-gradient-background has-background has-medium-font-size\">\ud83d\udce9Explore how IVOL and other factors perform in your portfolio universe?&nbsp;<br>Visit<strong><em> <a href=\"https:\/\/www.tejwin.com\/en\/news\/factor-library\/\" data-type=\"link\" data-id=\"https:\/\/www.tejwin.com\/en\/news\/factor-library\/\">TEJ Factor Library<\/a><\/em><\/strong><a href=\"https:\/\/www.tejwin.com\/en\/news\/factor-library\/\" data-type=\"link\" data-id=\"https:\/\/www.tejwin.com\/en\/news\/factor-library\/\"> <\/a>or contact us to request a <strong>custom factor analysis demo<\/strong>.&nbsp;<\/p>\n\n\n\n<div style=\"height:22px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Further_Reading\"><\/span><strong>Further Reading:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><a href=\"https:\/\/www.tejwin.com\/en\/insight\/how-dividend-policy-affects-investment-an-event-study-analysis-of-key-factors\/\" data-type=\"link\" data-id=\"https:\/\/www.tejwin.com\/en\/insight\/how-dividend-policy-affects-investment-an-event-study-analysis-of-key-factors\/\">How Dividend Policy Affects Investment: An Event Study Analysis of Key Factors<\/a><\/li>\n\n\n\n<li><a href=\"https:\/\/www.tejwin.com\/en\/insight\/charles-brandes-value-investing-principles-building-a-portfolio-with-a-margin-of-safety-nemo\/\" data-type=\"link\" data-id=\"https:\/\/www.tejwin.com\/en\/insight\/charles-brandes-value-investing-principles-building-a-portfolio-with-a-margin-of-safety-nemo\/\">Charles Brandes&#8217; Value Investing Principles : Building a Portfolio with a Margin of Safety<\/a><\/li>\n<\/ul>\n\n\n\n<p><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Building on the statistical foundation presented in Part 1, this article explores how Idiosyncratic Volatility (IVOL) can be effectively applied in investment strategy design. We present two categories of approaches: a single-factor sorting model and a set of filter-enhanced momentum strategies. Through robust backtesting across two decades of Taiwan stock market data, we demonstrate how IVOL can improve risk-adjusted performance when used as a portfolio filter\u2014especially when combined with momentum or dividend-based signals. <\/p>\n","protected":false},"featured_media":37312,"template":"","tags":[3442,3231,2962,2987,3421],"insight-category":[690],"class_list":["post-37307","insight","type-insight","status-publish","has-post-thumbnail","hentry","tag-alpha-2","tag-factors-research","tag-market-data","tag-quant","tag-quantitative-strategy","insight-category-data-analysis"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/insight\/37307","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/insight"}],"about":[{"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/types\/insight"}],"version-history":[{"count":6,"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/insight\/37307\/revisions"}],"predecessor-version":[{"id":39564,"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/insight\/37307\/revisions\/39564"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/media\/37312"}],"wp:attachment":[{"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/media?parent=37307"}],"wp:term":[{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/tags?post=37307"},{"taxonomy":"insight-category","embeddable":true,"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/insight-category?post=37307"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}