Abstract
This thesis answers five key questions to contribute insights into the low-risk anomaly within six major European equity markets (France, Italy, the Netherlands, Spain, Switzerland, and the United Kingdom) from 1995 to 2023. We analyze the robustness of low-risk investing strategies, the driving factors behind the low-risk anomaly (leverage constraints versus behavioral theory), and the feasibility of implementing low-risk strategies in practice. Returns are in local currency in excess of the national risk-free rate to take the perspective of a European investor.
The risk-return analysis shows a clear decline in risk-adjusted returns from low-beta to high-beta portfolios, indicating higher returns from low-beta stocks. Our findings confirm the presence of the low-risk anomaly in European equity markets and suggest that profitable opportunities through low-risk investing strategies exist (Question 1). The systematic risk factors, particularly betting against beta (BAB) and betting against correlation (BAC), generate robust alphas while Betting against volatility (BAV) have weaker performance. This indicates that leverage constraints play a significant role in driving the low-risk anomaly (Question 2). In contrast, the analysis of idiosyncratic risk factors (LMAX, SMAX, and IVOL) generally show weak performance when analyzed in the full sample (1998-2023). This suggests either the inadequacy of these factors in capturing lottery-like preferences or the absence of such preferences among market participants (Question 3).
The robustness of low-risk investing strategies across subperiods is examined. BAB consistently performs well and maintains superior results across subperiods. BAC and BAV exhibit significant alphas in Subperiod 2 (1998-2013), indicating the presence of leverage constraints over time. However, idiosyncratic risk factors do not demonstrate significant alphas in Subperiod 1 but show robust alphas in Subperiod 2 (2014-2023), suggesting an increasing influence of lottery-like preferences in recent years (Question 4). We consider different weighting schemes for BAB, with value-weighting and equally-weighting resulting in lower alphas than rank-weighting. However, significant positive alphas are still achieved across all weighting schemes, emphasizing the feasibility and robustness of the BAB strategy for institutional investors (Question 5).
Uddannelser | Cand.merc.fin Finance and Investments, (Kandidatuddannelse) Afsluttende afhandling |
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Sprog | Engelsk |
Udgivelsesdato | 2023 |
Antal sider | 124 |
Vejledere | Anders Bjerre Trolle |