Low Risk Anomaly Everywhere - Evidence from Equity Sectors

25 Pages Posted: 20 Nov 2014

See all articles by Raul Leote de Carvalho

Raul Leote de Carvalho

BNP Paribas Asset Management

Majdouline Zakaria

BNP Paribas - BNP Paribas Investment Partners; Université Paris Dauphine - LEDa-SDFi

Lu Xiao

BNP Paribas Investment Partners

Pierre Moulin

BNP Paribas Investment Partners

Date Written: November 19, 2014

Abstract

We give strong empirical evidence of a risk anomaly in equity sectors in a number of regions and countries of developed and emerging markets, with the lowest risk stocks in each activity sector generating higher returns than would be expected given their levels of risk, and the converse outcome for the riskier stocks. We believe this evidence is a likely consequence of the fact that equity analyst and active fund managers tend to specialize in particular sectors and to mainly select stocks from those sectors. Additionally, constraints restricting the deviation of sector weights in active portfolios against their market capitalization benchmarks are often used by active fund managers, in particular by quantitative managers which tend to go as far as being sector neutral. As a consequence, we find that sector-neutral, low-risk approaches appear more efficient at generating alpha than non-sector neutral approaches, with the latter showing strong sector allocation towards financials, utilities and consumer staples than sector neutral, at least when applied to developed countries in a global universe. We also discuss some properties of low-risk investing such as tail risk, turnover and liquidity.

Suggested Citation

Carvalho, Raul Leote de and Zakaria, Majdouline and Xiao, Lu and Moulin, Pierre, Low Risk Anomaly Everywhere - Evidence from Equity Sectors (November 19, 2014). Available at SSRN: https://ssrn.com/abstract=2527852 or http://dx.doi.org/10.2139/ssrn.2527852

Raul Leote de Carvalho (Contact Author)

BNP Paribas Asset Management ( email )

14 rue Bergere
Paris, 75009
France
0033158972183 (Phone)

Majdouline Zakaria

BNP Paribas - BNP Paribas Investment Partners ( email )

14 rue Bergere
Paris, 75009
France

Université Paris Dauphine - LEDa-SDFi ( email )

Place du Maréchal de Lattre de Tassigny
Paris, Cedex 16 75775
France

Lu Xiao

BNP Paribas Investment Partners ( email )

14 rue bergère
Paris, 75009
France

Pierre Moulin

BNP Paribas Investment Partners ( email )

Paris
France

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