Low Risk Anomalies?

Paul Schneider, Christian Wagner, Josef Zechner

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

This paper shows that stocks' CAPM alphas are negatively related to CAPM betas if investors demand compensation for negative skewness. Thus, high (low) beta stocks appear to underperform (outperform). This apparent anomaly merely reflects compensation for residual coskewness ignored by the CAPM. Empirically, we find that option-implied ex-ante skewness is strongly related to ex-post residual coskewness and alphas. Beta- and volatility-based low risk anomalies are largely driven by a single principal component, which is in turn largely explained by skewness. Controlling for skewness renders the alphas of betting-against-beta and -volatility insignificant.
This paper shows that stocks' CAPM alphas are negatively related to CAPM betas if investors demand compensation for negative skewness. Thus, high (low) beta stocks appear to underperform (outperform). This apparent anomaly merely reflects compensation for residual coskewness ignored by the CAPM. Empirically, we find that option-implied ex-ante skewness is strongly related to ex-post residual coskewness and alphas. Beta- and volatility-based low risk anomalies are largely driven by a single principal component, which is in turn largely explained by skewness. Controlling for skewness renders the alphas of betting-against-beta and -volatility insignificant.

Conference

ConferenceThe 77th Annual Meeting of American Finance Association. AFA 2017
Number77
LocationSheraton Grand Chicago
CountryUnited States
CityChicago
Period06/01/201708/01/2017
Internet address

Keywords

  • Low risk anomaly
  • Skewness
  • Risk premia
  • Equity options

Cite this

Schneider, P., Wagner, C., & Zechner, J. (2017). Low Risk Anomalies?. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.DOI: 10.2139/ssrn.2593519
Schneider, Paul ; Wagner, Christian ; Zechner, Josef. / Low Risk Anomalies?. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.72 p.
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Schneider, P, Wagner, C & Zechner, J 2017, 'Low Risk Anomalies?' Paper presented at, Chicago, United States, 06/01/2017 - 08/01/2017, . DOI: 10.2139/ssrn.2593519

Low Risk Anomalies? / Schneider, Paul; Wagner, Christian; Zechner, Josef.

2017. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.

Research output: Contribution to conferencePaperResearchpeer-review

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Schneider P, Wagner C, Zechner J. Low Risk Anomalies?. 2017. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States. Available from, DOI: 10.2139/ssrn.2593519