Abstract
This thesis examines the low-risk anomaly in the Nordic equity markets. Using market data on 1,388 stocks of the countries of Denmark, Norway, Sweden and Finland over the period 01.1990 to 03.2022, the paper provides sound evidence for the existence of the low-risk anomaly across all four countries using both time-series and cross-sectional tests. The paper reveals statistically significant inverse relationships between risk-adjusted performance measures (alpha, Treynor ratio and Sharpe ratio) and risk, and, furthermore, detects a flat and insignificant slope of the empirical security market line, suggesting that systematic risk is not adequately rewarded. We find anomalously high returns to investments in low-risk portfolios whereas those of high-risk are typically associated with underperformance, which is especially documented for the country of Norway. Additionally, we show that low-risk strategies, which exploit the anomalous return patterns in the cross-section of stocks by betting against beta (BAB) and volatility (BAV) risk, produce high and statistically significant Sharpe ratios and alphas accounting for exposures of the strategies to both market, value, size and momentum risk. Here, on a cross-country basis, the BAB generates an average yearly alpha and Sharpe ratio of 12.2% and 0.75, respectively, whereas, for BAV, these values are 5.1% and 0.59. Moreover, as we look into the potential explanations for the existence of the low-risk anomaly, our results neither confine perfectly with the explanatory theory of leverage constraints nor that of behavioral preferences for lottery, as we find ambiguous results for and against both theories. More specifically, with respect to leverage constraint theory, we find inconsistent results as the level of funding tightness does not positively predict future returns on betting-against-risk strategies that use leverage, whereas, for the preferences for lottery theory, we do not find clear evidence of excessive investor demand and overpricing of stocks with positively-skewed highly-unsystematic lottery-like returns. Finally, as we dissect the risk and sector characteristics of low-risk strategies and stocks, we find that low-risk investing generally overlaps with momentum investing, and that low-risk firms typically belong to defensive non-cyclical GICS sectors such as industrials, utilities, consumer staples, communication services.
Uddannelser | Cand.merc.fin Finance and Investments, (Kandidatuddannelse) Afsluttende afhandling |
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Sprog | Engelsk |
Udgivelsesdato | 2022 |
Antal sider | 132 |
Vejledere | Anders Bjerre Trolle |