Re-Evaluation of the Low-Risk Anomaly in Finance via Matching

16 Pages Posted: 21 Nov 2013 Last revised: 14 Dec 2013

See all articles by Yang Lu

Yang Lu

Williams College

Daniel Wu

Harvard University

Kwok Yu

Harvard University

Date Written: December 13, 2013

Abstract

The long-term success of low-risk stocks over high-risk stocks runs contrary to the basic finance principle that risk is compensated with higher expected returns. Our paper examines this low-risk anomaly using Coarsened Exact Matching to balance high and low-risk stock portfolios on industry, company size, and trading volume. After matching, we find that the low-risk anomaly still exists but has a more muted effect than in previous studies, specially when beta is used as a measure of risk. We also find moments in which the low-risk anomaly does not hold, most notably during the dot-com bubble. To our knowledge, we are the first to apply matching techniques to the study of the low-risk anomaly, and our findings complicate various previous explanations of this phenomenon.

Keywords: low volatility, beta, market efficiency, matching, capital asset pricing model

JEL Classification: C19, G12

Suggested Citation

Lu, Yang and Wu, Daniel and Yu, Kwok, Re-Evaluation of the Low-Risk Anomaly in Finance via Matching (December 13, 2013). Available at SSRN: https://ssrn.com/abstract=2354965 or http://dx.doi.org/10.2139/ssrn.2354965

Yang Lu (Contact Author)

Williams College ( email )

Williamstown, MA 01267
United States

Daniel Wu

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Kwok Yu

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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