The Volatility Effect in China

Abstract

This paper shows that low-risk stocks significantly outperform high-risk stocks in the local China A-share market. The main driver of this low-risk anomaly is volatility, and not beta. A Fama–French style VOL factor is not explained by the Fama–French–Carhart factors, and has the strongest stand-alone performance among all these factors. Our findings are robust across sectors and over time, and consistent with previous empirical evidence for the US and international markets. Moreover, the VOL premium exhibits excellent investability characteristics, as it involves a low turnover and remains strong when applied to only the largest and most liquid stocks. Our results imply that the volatility effect is a highly pervasive phenomenon, and that explanations should be able to account for its presence in highly institutionalized markets, such as the US, but also in the Chinese market where private investors dominate trading.

Analyzing the Performance of Pakistan Equity Mutual Funds Using Multifactor Models: Pre-COVID Analysis

“…The value investing theory revolves around identifying companies that are perceived to be undervalued by the market, with their stock prices trading below their intrinsic or fundamental value. Value investors hold the belief that the market often overreacts to short-term news and events, creating opportunities for investors with a longer-term perspective (Blitz, Hanauer, & van, 2021).…”

“…The relationship between the value factor and mutual fund performance is a subject of interest for investors and researchers. The value factor can have an impact on the performance of mutual funds, especially those that follow a value-oriented investment strategy (Blitz, Hanauer & van 2021). However, it's important to note that the relationship can vary depending on various factors, including market conditions, fund management style, and the specific holdings within the mutual fund Routledge, 2019).…”

“…The authors suggested that the underperformance of the value factor could be attributed to the uncertainty caused by the pandemic. In a more recent study, Blitz, Hanauer, and van (2021) examined the efficacy of…”

“…Dirkx and Peter (2020) also emphasized the significance of the value factor as a driver of stock returns. Blitz, Hanauer, and van (2021) investigated the use of factor investing with the Fama-French factors, including the value factor. They concluded that factor investing offers diversification benefits and improved risk-adjusted returns, with the value factor playing a particularly important role.…”