Low‐Risk Anomalies?

Schneider, Paul; Wagner, Christian; Zechner, Josef

doi:10.1111/jofi.12910

Cited by 109 publications

(17 citation statements)

References 81 publications

(109 reference statements)

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“…By isolating the size effect from correlation and beta, we can uncover an upward-sloping security market line, supporting the rational pricing channel due to return commonality. Second, our findings are consistent with the recent literature that provides a rational justification for the low-risk anomaly (Schneider et al, 2020). We document that the low-beta/low-correlation anomaly (due to the size-explained component) could also stem from risk, because the negative price of the size-explained component is, to a large extent, related to illiquidity and coskewness in the cross section.…”

Section: Discussionsupporting

confidence: 91%

“…Moreover, the proportion explained by illiquidity amounts to 53.15%, whereas the proportion explained by coskewness is at 6.04%, suggesting that the liquidity risk (or information friction) is a more important driver of the size effect. Overall, our results support the arguments of Asness et al (2018) and Schneider et al (2020).…”

Section: Implications On the Profitability Of Bab And Bac Strategiessupporting

confidence: 89%

“…As a result, the pricing ability of the size-orthogonal correlation reflects risk compensation rather than market mispricing. In addition, we confirm the recent studies of Asness et al (2018) and Schneider et al (2020) that illiquidity and coskewness contribute to the size effect with the approach of Hou and Loh (2016). Therefore, we suggest that the low-correlation anomaly is contributed by the mixture of two risk factors, size and size-orthogonalized correlation, with opposite signs of prices.…”

Section: Hypothesis 1bsupporting

confidence: 89%

“…Alternatively, the low-beta anomaly might also be reconciled with the traditional risk-based asset pricing theory, if there exists some latent risk factor(s) that capture(s) the time-series variation of the beta-sorted portfolios in a meaningful manner. For example, following Kraus and Litzenberger (1976) and Harvey and Siddique (2000), Schneider et al (2020) incorporate squared market returns into the CAPM framework as an additional systematic factor. With the two-factor pricing kernel, they show that the CAPM beta, which ignores the coskewness effect on asset pricing, systematically overestimates the risk of high-beta stocks.…”

Section: Literature Reviewmentioning

confidence: 99%

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Correlation and the omitted variable: A tale of two prices

Han

Pan

2020

Financial Management

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We offer a new perspective on the low-beta anomaly by acknowledging the omitted-variable problem in the correlation component of beta: Correlation is "plagued" by firm size (the omitted variable) to exhibit a negative price. Once isolating the size impact, a hidden positive price emerges for the size-orthogonalized component of correlation. Further analyses suggest that (a) the positive price of the sizeorthogonalized component is not due to mispricing, supporting the return comovement-based pricing channel; (b) the negative price of the size-explained component is related to illiquidity and coskewness.; (c) the omitted-variable problem also applies to the pricing of beta.

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Section: Discussionsupporting

confidence: 91%

Section: Implications On the Profitability Of Bab And Bac Strategiessupporting

confidence: 89%

Section: Hypothesis 1bsupporting

confidence: 89%

Section: Literature Reviewmentioning

confidence: 99%

See 2 more Smart Citations

Correlation and the omitted variable: A tale of two prices

Han

Pan

2020

Financial Management

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“…Interestingly, Germany, a market with positive average skewness during the sample period, has the lowest BAB Sharpe ratio, while the USA market and the global portfolio have negative skewness values of −0.17 and −0.31, respectively. These results are consistent with the skewness explanation of the BAB factor as suggested by Schneider et al (2020). The value factors generally present low Sharpe ratios, reflecting the relatively bad performance of value investing during the last twenty years.…”

Section: Mean Returns Volatilities and Sharpe Ratiossupporting

confidence: 89%

The Effects of the COVID-19 Crisis on Risk Factors and Option-Implied Expected Market Risk Premia: An International Perspective

Nieto

Rubio

2022

JRFM

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Institutional investors often have to decide which strategy to use across international business cycles. This is especially important during economic and financial crises. The exogenous nature of the outbreak of the dramatic COVID-19 crisis represents a unique opportunity to understand the performance of risk factors during severe economic times across international stock markets. Even more important is to analyze how these factors behave across very different economic crises, such as the COVID-19 pandemic and the Great Recession. Although, the overall results show that the momentum and quality factors are the winners, with the value factor as the loser, this research also reports different responses of factors across crises and countries. The size, value, and defensive factors tend to perform worse during the health crisis relative to the Great Recession, while the momentum factor shows a poor performance during the financial crisis, but a positive one during the outbreak of COVID-19. The quality factor is an extraordinary defensive factor in both crises. Similarly, this paper reports heterogeneous responses of option-implied expected market risk premia across alternative stock market indices, and between the Great Recession and the COVID-19 crisis.

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On the time‐varying relationship between coskewness and returns of banks

Bressan

Weissensteiner

2023

Rev Financ Econ

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For a sample of US commercial banks, we find that during the Global Financial Crisis of 2007–2009 and the COVID‐19 pandemic of February–December 2020, bank returns were positively related to their coskewness with the market return, while the relationship was negative during stable periods. The literature on non‐financial firms and global equity indices has shown that the relationship between coskewness and stock returns is time‐variant. The findings of this study extend that evidence to banks. The interpretation is that in normal times, investors show a preference for “lotteryness,” and therefore they are willing to pay a premium for bank stocks with a high coskewness (i.e., low expected return). In contrast, during crises, stocks with a high coskewness are more likely to suffer deep losses, and investors are reluctant to demand these risky high returns. These findings deliver important insights into how to interpret bank capital costs throughout the business cycle, as we suggest that during crises the issuance of equity capital becomes more costly for banks because investors demand higher coskewness risk premiums.

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Low‐Risk Anomalies?

Cited by 109 publications

References 81 publications

Correlation and the omitted variable: A tale of two prices

Correlation and the omitted variable: A tale of two prices

The Effects of the COVID-19 Crisis on Risk Factors and Option-Implied Expected Market Risk Premia: An International Perspective

On the time‐varying relationship between coskewness and returns of banks

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