Abstract
The aim of this paper is to examine country-level parallels to the stock-level low-risk anomaly. The inter-market variation in returns do not follow the intra-market patterns. The country-level returns are positively related to standard deviation, value at risk, and idiosyncratic volatility, although the effect is largely explained by cross-national value, size and momentum effects. The risk-return links seem stronger for idiosyncratic risk and almost non-existent for systematic risk (market beta). Furthermore, an additional sorting on value at risk can markedly improve the performance of country-level size and value strategies. The investigations are based on a cross-section of 78 national stock markets for years 1999-2014.
Highlights
IntroductionThe crucial assumption of the Eurasian Econ Rev (2016) 6:45–65 capital asset pricing model (CAPM) of Sharpe (1964), Lintner (1965) and Black (1972) is the existence of a positive linear relationship between the systematic stock market risk measured with their betas and the expected returns
This paper is aimed at examining the low-risk anomaly at the country level
The calculation performed in this study shows no parallels between the country-level and the stock-level low-risk anomalies
Summary
The crucial assumption of the Eurasian Econ Rev (2016) 6:45–65 capital asset pricing model (CAPM) of Sharpe (1964), Lintner (1965) and Black (1972) is the existence of a positive linear relationship between the systematic stock market risk measured with their betas and the expected returns. This relationship has been generally confirmed by the initial tests of the U.S stock market (Black et al 1972; Fama and MacBeth 1973; Blume 1970; Miller and Scholes 1972; Blume and Friend 1973). Ang et al (2006a) focus on the downside risk and show that the crosssection analysis of stock returns reflects a significant downside risk premium
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