Abstract
This paper shows that low-risk stocks significantly outperform high-risk stocks in the local China A-share market. The main driver of this low-risk anomaly is volatility, and not beta. A Fama–French style VOL factor is not explained by the Fama–French–Carhart factors, and has the strongest stand-alone performance among all these factors. Our findings are robust across sectors and over time, and consistent with previous empirical evidence for the US and international markets. Moreover, the VOL premium exhibits excellent investability characteristics, as it involves a low turnover and remains strong when applied to only the largest and most liquid stocks. Our results imply that the volatility effect is a highly pervasive phenomenon, and that explanations should be able to account for its presence in highly institutionalized markets, such as the US, but also in the Chinese market where private investors dominate trading.
Highlights
This paper shows that there exists a strong, distinct, robust, and investable low-risk anomaly in the China A stock market
This phenomenon has been extensively documented for the US and other stock markets, and in this paper we extend this result to the China A-share market
For the US market, Novy-Marx (2014) and Fama and French (2016) argue that the low-risk anomaly is subsumed by profitability and investment factors, but we find that this result does not carry over to the Chinese market
Summary
This paper shows that there exists a strong, distinct, robust, and investable low-risk anomaly in the China A stock market. The low-risk anomaly is the empirical result that the relation between risk and return is not positive, as predicted by theoretical models, but flat, or even inverted This phenomenon has been extensively documented for the US and other stock markets, and in this paper we extend this result to the China A-share market. Our work is most closely related to Cheung et al (2015) and Hsu et al (2018), who examine the general effectiveness of asset pricing factors in China Both studies document the existence of a low-volatility anomaly, as in Blitz and van Vliet (2007). Novy-Marx and Velikov (2016) find that most high-turnover
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