scholarly journals Low-risk effect: evidence, explanations and approaches to enhancing the performance of low-risk investment strategies

2020 ◽  
Vol 17 (2) ◽  
pp. 128-145
Author(s):  
Mayank Joshipura ◽  
Nehal Joshipura
Keyword(s):  
Stock Exchange ◽  
Empirical Studies ◽  
Investment Strategy ◽  
The Body ◽  
Low Risk ◽  
Investment Strategies ◽  
Momentum Effect ◽  
Risk Return ◽  
Risk Effect ◽  
Risk Investment

The authors offer evidence for low-risk effect from the Indian stock market using the top-500 liquid stocks listed on the National Stock Exchange (NSE) of India for the period from January 2004 to December 2018. Finance theory predicts a positive risk-return relationship. However, empirical studies show that low-risk stocks outperform high-risk stocks on a risk-adjusted basis, and it is called low-risk anomaly or low-risk effect. Persistence of such an anomaly is one of the biggest mysteries in modern finance. The authors find strong evidence in favor of a low-risk effect with a flat (negative) risk-return relationship based on the simple average (compounded) returns. It is documented that low-risk effect is independent of size, value, and momentum effects, and it is robust after controlling for variables like liquidity and ticket-size of stocks. It is further documented that low-risk effect is a combination of stock and sector level effects, and it cannot be captured fully by concentrated sector exposure. By integrating the momentum effect with the low-volatility effect, the performance of a low-risk investment strategy can be improved both in absolute and risk-adjusted terms. The paper contributed to the body of knowledge by offering evidence for: a) robustness of low-risk effect for liquidity and ticket-size of stocks and sector exposure, b) how one can benefit from combining momentum and low-volatility effects to create a long-only investment strategy that offers higher risk-adjusted and absolute returns than plain vanilla, long-only, low-risk investment strategy.

Low-risk investment strategy: sector bets or stock bets?

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Shilpa Peswani ◽  
Mayank Joshipura
Keyword(s):  
Asset Pricing ◽  
High Risk ◽  
Investment Strategy ◽  
Low Risk ◽  
Investment Strategies ◽  
Stock Level ◽  
Content Type ◽  
Risk Effect ◽  
Value Effect ◽  
Risk Investment

PurposeThe portfolio of low-risk stocks outperforms the portfolio of high-risk stocks and market portfolios on a risk-adjusted basis. This phenomenon is called the low-risk effect. There are several economic and behavioral explanations for the existence and persistence of such an effect. However, it is still unclear whether specific sector orientation drives the low-risk effect. The study seeks to answer the following important questions in Indian equity markets: (a) Whether sector bets or stock bets mainly drive the low-risk effect? (b) Is it a mere proxy for the well-known value effect? (c) Does the low-risk effect prevail in long-only portfolios?Design/methodology/approachThe study is based on all the listed stocks on the National Stock Exchange (NSE) of India from December 1994 to September 2018. It classifies them into 11 Global Industry Classification Standard (GICS) sectors to construct stock-level and sector-level BAB (Betting Against Beta) and long-only low-risk portfolios. It follows the study of Asness et al. (2014) to construct various BAB portfolios. It applies Fama–French (FF) three-factor and Fama–French–Carhart (FFC) four-factor asset pricing models in addition to Capital Asset Pricing Model (CAPM) to examine the strength of BAB, sector-level BAB, stock-level BAB and long-only low-beta portfolios.FindingsBoth sector- and stock-level bets contribute to the return of the low-risk investing strategy, but the stock-level effect is dominant. Only betting on safe sectors or industries will not earn economically significant alpha. The low-risk effect is unique and not a value effect in disguise. Both long-short and long-only portfolios within sectors and industry groups deliver positive excess returns. Consumer staples, financial, materials and healthcare sectors mainly contribute to the returns of the low-risk effect in India. This study offers empirical evidence against the Samuelson (1998) micro-efficient market given the strong performance of the stock-level low-risk effect.Practical implicationsThe superior performance of the low-risk investment strategies at both stock and sector levels offers investors an opportunity to strategically invest in stocks from the right sectors and earn high risk-adjusted returns with lower drawdowns over an entire market cycle. Besides, it paves the way for stock exchanges and index manufacturers to launch sector-specific low-volatility indices for relevant sectors. Passive funds can launch index funds and exchange-traded funds by tracking these indices. Active fund managers can espouse sector-specific low-risk investment strategies based on the results of this and similar other studies.Originality/valueThe study is the first of its kind. It offers insights into the portfolio characteristics and performance of the long-short and the long-only variant of low-risk portfolios within sectors and industry groups. It decomposes the low-risk effect into sector-level and stock-level effects.

scholarly journals Leverage constraints or preference for lottery: What explains the low-risk effect in India?

2021 ◽  
Vol 18 (2) ◽  
pp. 48-63
Author(s):  
Shilpa Peswani ◽  
Mayank Joshipura
Keyword(s):  
Stock Exchange ◽  
Risk Measures ◽  
The Body ◽  
Low Risk ◽  
Idiosyncratic Volatility ◽  
Indian Market ◽  
Preference Theory ◽  
Demand Theory ◽  
Risk Effect ◽  
Highly Correlated

The study empirically investigates two theories that claim to explain the low-risk effect in Indian equity markets using a universe of stocks listed on the National Stock Exchange of India (NSE) from January 2000 to September 2018. Leverage constraints and preference for lottery are two major competing theories that explain the presence and persistence of the low-risk effect. While the leverage constraints theory argues that systematic risk drives low-risk anomaly and therefore risk should be measured using beta, lottery demand theory claims that irrational investor’s preference towards stocks with lottery-like payoffs is responsible for the persistence of the low-risk effect, and risk should be measured by idiosyncratic volatility. However, given that most of the risk measures are highly correlated, it is not easy to precisely measure a specific theory’s contribution to explaining the low-risk effect. The study constructs the Betting against correlation (BAC) factor to measure the contribution of leverage constraints to the low-risk effect. It further constructs the SMAX factor to untangle the contribution of lottery preference theory. The results show that leverage constraints theory predominantly explains the low-risk effect in Indian markets. This study contributes significantly to the body of literature, as this is the first such study on the Indian market, one of the major emerging markets, especially when the debate on theories explaining the low-risk effect is yet to settle.

Investigating the low-risk anomaly in South Africa

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Yudhvir Seetharam
Keyword(s):  
South Africa ◽  
Kalman Filter ◽  
Stock Exchange ◽  
Low Risk ◽  
Momentum Effect ◽  
Content Type ◽  
Share Prices ◽  
Johannesburg Stock Exchange ◽  
High Volatility ◽  
Finance Theory

PurposeRecent studies have shown that low-volatility shares outperform high-volatility shares. Given the conventional finance theory that risk drives return, this study aims to investigate and attempt to explain the presence of the low-risk anomaly (LRA) in South Africa.Design/methodology/approachUsing share prices from 1990 to 2016, various buy-and-hold strategies are constructed to determine the return to an investor attempting to capitalise on such an anomaly. These strategies involve combinations relating to a price filter, the calculation of risk and volatility, value-weighting or equal-weighting of portfolios and the window period to construct said portfolios.FindingsIt was found that the LRA exists on the Johannesburg Stock Exchange (JSE_=) when using univariate sorts, without controlling for the size or value effect. When using multivariate portfolio sorts (size and volatility or value and volatility), it was found that the LRA does not exist on the JSE under the majority of risk proxies, but particularly prevalent when downside risk is used. This loosely points towards a potential “inverse momentum” effect where low-return portfolios outperform their counterparts.Originality/valueIn general, it is established that the risk–return relationship is non-linear and deterministic under traditional proxies, but improves to being somewhat, but not completely, linear under a Kalman filter. The Kalman filter, which can be considered a proxy for learning, does not remove the anomaly in its entirety, indicating that behavioural approaches are needed to explain such phenomena.

One piece does not a puzzle make: the first-mover decision as one piece on the foreign investment strategy puzzle

2014 ◽  
Vol 8 (3) ◽  
pp. 193-208
Author(s):  
Bradley J. Koch
Keyword(s):  
Foreign Investment ◽  
Empirical Studies ◽  
Investment Strategy ◽  
Strategic Decision ◽  
Investment Strategies ◽  
Strategic Decisions ◽  
Content Type ◽  
First Mover Advantage ◽  
First Mover ◽  
Better Than

Purpose – The purpose of this paper is to analyze the first-mover decision as one decision of a set of strategic decisions that ultimately determine performance. Design/methodology/approach – The author used survey data collected from foreign-invested firms in Sichuan, China, to test for evidence that first-movers perform better than late-movers. Findings – The results reveal that there is a first-mover advantage when the other strategic variables are not included in the model. When the entire set of strategic variables is included, however, the first mover variable loses its significance and the willingness of the foreign partner to commit additional resources becomes the best predictor of performance. Consequently, it was argued that foreign investment strategies should be analyzed as a set of strategic decisions managers make to formulate the best mix. Originality/value – The empirical evidence for the first-mover advantage may not be as well grounded as many have thought. When the first-mover strategic decision is analyzed in isolation from other strategic variables, which is commonly done in many empirical studies, it indicates that firms that enter China before their competitors perform better. Unfortunately, it is more logical to assume that managers dynamically develop a set of strategic decisions that ultimately determine the firm’s performance. To extrapolate one static decision from the strategic decision set and make broad assertions about its effect of performance is an over-simplification of the strategic decision process.

scholarly journals The Momentum Effect Exemplifies The Influence of Investors’ Irrational Behaviour on Changing Prices of Shares and Stocks: An Analysis of The Momentum Effect on The Warsaw Stock Exchange

e-Finanse ◽  
2015 ◽  
Vol 11 (1) ◽  
pp. 56-64 ◽  
Author(s):  
Paweł Merło ◽  
Patryk Konarzewski
Keyword(s):  
Capital Markets ◽  
Stock Exchange ◽  
January Effect ◽  
Strong Impact ◽  
Investment Strategies ◽  
Momentum Effect ◽  
Return Rates ◽  
Time Period ◽  
New Information ◽  
Warsaw Stock Exchange

Abstract An efficient market should not show any anomalies. When new information reaches a market which is efficient, it should automatically translate into prices of assets, which ought to eliminate the possibility of gaining an advantage over other investors, thus preventing excess profits. However, studies on capital markets indicate that in reality it is possible to earn unusually high profits by taking advantage of certain anomalies which occur on a given market. Among such anomalies there is the momentum effect. This study performed on the Stock Exchange in Warsaw has shown that the momentum effect occurred throughout the entire analyzed time period. Positive returns demonstrated for investment strategies based on the momentum effect were unexplainable by the classical theory of finances. A correlation was found between the economic situation on the stock exchange and portfolio return rates, but it was too weak to attribute the effect to a single decisive factor. In addition, the returns from investments based on the momentum effect were statistically higher in January than in the other months, which was caused by the January effect, stimulating the occurrence of statistically higher returns at the beginning of a year rather than later on during the analyzed period of time. Research in this field carried out in other countries justifies the claim that there are many irrational factors which together create the momentum effect on the stock exchange. Thus, it is possible to conclude that irrational decisions may have strong impact on the pricing of stocks on the capital market. The momentum effect persisted throughout the entire analyzed period, although its power changed cyclically, which coincides with results of research carried out in other countries. The fact that the momentum effect did not disappear may suggest that the factors involved in its creation are an indispensable part of the market, and this seems to undermine the commonly accepted hypothesis about the efficiency of capital markets.

scholarly journals Returns to Low Risk Investment Strategy

2017 ◽  
Vol 6 (01) ◽  
pp. 2-15 ◽  
Author(s):  
Shilpa Girish Peswani
Keyword(s):  
High Risk ◽  
Stock Exchange ◽  
Risk Measures ◽  
Risk Measure ◽  
Investment Strategy ◽  
Low Risk ◽  
Total Risk ◽  
Excess Returns ◽  
Benchmark Portfolio ◽  
The Difference

The paper studies the low risk anomaly in the Indian market using entire National Stock Exchange (NSE) as sample from January 2001 to June 2016. It provides evidence that low risk portfolio sorted for total risk, systematic risk as well as unsystematic risk individually for the large cap, mid cap, small cap and the entire NSE universe give higher returns to the investor as compared to high risk portfolio. The difference of returns from low risk portfolio versus high risk portfolio is positive as well as economically and statistically significant for all the risk measures. The results also prove that low risk portfolio investing strategy returns outperform the benchmark portfolio. Using either total volatility, idiosyncratic volatility or beta as a risk measure in stocks, the low risk portfolio gives higher returns even after controlling for the well-known size, value and momentum factors. The excess returns are the highest for low risk portfolio sorted for volatility of large cap stocks. Most of the low risk portfolios consists of growth and winner stocks. In conclusion, the low risk portfolio investment strategy is independent of size and gives positive excess returns as compared to high risk portfolio in the Indian stock market.

scholarly journals Momentum Effect in Developed and Emerging Stock Markets

2020 ◽  
Vol 2 (2) ◽  
pp. 1-1
Author(s):  
Zulfiqar Ali Imran ◽  
Woei-Chyuan Wong ◽  
Rusmawati Ismail
Keyword(s):  
Stock Markets ◽  
Efficient Market Hypothesis ◽  
Investment Strategy ◽  
Investment Strategies ◽  
Momentum Effect ◽  
Short Term ◽  
Emerging Stock Markets ◽  
Contradictory Finding ◽  
Momentum Investing ◽  
Abnormal Profits

The study aims to reaffirms the existence of short-term momentum effect in 13 developed and emerging stock markets where previous literature has lack of consensus. Although many studies emphasis on the existence of momentum effect, but still, there are substantial number of researchers that deny the its presence. The contradictory finding of many researchers over the existence of momentum effect, raises a serious question, to what extend our stock markets are informationally efficient and whether investor can make abnormal profits by using momentum investment strategies. This study applies momentum investment strategy, J6K6, to calculate momentum returns. Our study finds negative significant momentum effect in all 13 stock markets. Although momentum effect is present in 13 countries but Investors are not able to attain abnormal profit through momentum investing. These findings have an utmost importance for practitioners that they should not adopt momentum investment strategies in these countries as these strategies are generating lose. Moreover, stock market regulators should formulate these markets on the notion of efficient market hypothesis.

scholarly journals Time-Consistent Strategies for Multi-Period Portfolio Optimization with/without the Risk-Free Asset

2018 ◽  
Vol 2018 ◽  
pp. 1-20 ◽  
Author(s):  
Zhongbao Zhou ◽  
Xianghui Liu ◽  
Helu Xiao ◽  
TianTian Ren ◽  
Wenbin Liu
Keyword(s):  
Empirical Studies ◽  
Lagrange Function ◽  
Investment Strategy ◽  
Open Loop ◽  
Investment Strategies ◽  
Variance Model ◽  
Risky Assets ◽  
Consistent Solution ◽  
Mean Variance Portfolio ◽  
Mean Variance

The pre-commitment and time-consistent strategies are the two most representative investment strategies for the classic multi-period mean-variance portfolio selection problem. In this paper, we revisit the case in which there exists one risk-free asset in the market and prove that the time-consistent solution is equivalent to the optimal open-loop solution for the classic multi-period mean-variance model. Then, we further derive the explicit time-consistent solution for the classic multi-period mean-variance model only with risky assets, by constructing a novel Lagrange function and using backward induction. Also, we prove that the Sharpe ratio with both risky and risk-free assets strictly dominates that of only with risky assets under the time-consistent strategy setting. After the theoretical investigation, we perform extensive numerical simulations and out-of-sample tests to compare the performance of pre-commitment and time-consistent strategies. The empirical studies shed light on the important question: what is the primary motivation of using the time-consistent investment strategy.

scholarly journals Profitability of investment strategies developed on the basis of buy and sell recommendations

2021 ◽  
Vol 43 ◽  
pp. 317-338
Author(s):  
Paweł Wnuczak ◽  
Keyword(s):  
Stock Market ◽  
Capital Market ◽  
Stock Exchange ◽  
Investment Strategy ◽  
Jel Classification ◽  
Theory And Practice ◽  
Investment Strategies ◽  
Market Theory ◽  
Rates Of Return ◽  
Long Run

Aim/purpose – The paper has two objectives. The first is to examine the profitability of applying investment strategies based on “buy” and “sell” recommendations issued by stock market analysts. The second objective is to validate that analysts who issue a rec- ommendation may not be impartial (not supporting any of the sides involved in an argu- ment) because the largest group of recommendations issued is “buy” recommendations. Design/methodology/approach – This study was conducted based on all the “buy” and “sell” recommendations issued during the period between January 1, 2004 and Decem- ber 31, 2016 for companies listed on the Warsaw Stock Exchange, using data from www.bankier.pl. The annual forecast rates of return were determined for all the recom- mendations included in the survey. The expected rates of return were determined for each recommendation based on the information collated from the Bloomberg database. The regression analysis enabled the exploration of the relationship between the actual rates of return and the rates of return predicted in recommendations. Findings – It was determined that investing on the basis of the information included in “sell” recommendations might make it possible to avoid unprofitable investments. At the same time, the study shows that an investment strategy compliant with “buy” recom- mendations does not let the investor achieve the expected rates of return on an invest- ment in the capital market in the long term. Research implications/limitations – The conducted research could be an important source of information for stock market investors’ decision-making regarding investments Originality/value/contribution – Despite the topic of recommendation effectiveness being very important from the perspective of capital market theory and practice, it is still unclear whether investing based on information provided in stock market recommenda- tions can be a profitable strategy in the long run. The study offers a bridge to fill the existing research gap. Keywords: recommendations, stock exchange, investment. JEL Classification: G140

scholarly journals Australian Stock Exchange and sub-variants of price momentum strategies

2018 ◽  
Vol 15 (1) ◽  
pp. 224-235
Author(s):  
Abdullah Ejaz ◽  
Petr Polak
Keyword(s):  
Trading Volume ◽  
Stock Exchange ◽  
Abnormal Returns ◽  
Investment Strategies ◽  
Momentum Effect ◽  
Short Term ◽  
Momentum Strategies ◽  
Price Momentum ◽  
Return Behavior

The aim of this study is to examine the sub-variants of price momentum strategies. The paper recommends which sub-variants post above average returns for Australian Stock Exchange. It also analyzes the return behavior of short-term momentum effect among sub-variants of price momentum strategies. It has been found that monthly price momentum strategies result in above average abnormal returns, whereas weekly price momentum strategies should be used in combination with monthly price momentum strategies. Trading volume-based momentum investment strategies should not be used at all.

Sign in / Sign up

Export Citation Format

Share Document