Evidence of the Impact of Coskewness on the Low Risk Anomaly in European Stocks

Abstract

This paper investigates the low risk anomaly, which suggests that less risky stocks outperform riskier ones. Focusing on the European stock market, the present study examines the influence of coskewness, a measure of asymmetry in stock returns with respect to the market return. Stocks are sorted into 2x5 quintile portfolios based on coskewness and beta volatility. Regression analysis using Fama-French three and five factor models reveals a significant low risk anomaly in the low coskewness category, where less risky portfolios consistently outperform riskier ones. However, as coskewness increases, the low risk anomaly weakens and loses significance. In the high coskewness category, less risky portfolios no longer consistently outperform riskier ones. In other words, accounting for coskewness significantly lowers the profitability of low risk and betting-against-beta strategies in Europe. These findings enhance the understanding of the relationship between risk and returns in the European market.