Equity Anomalies and Idiosyncratic Risk Around the World
Multinational Finance Journal, Forthcoming
38 Pages Posted: 23 Nov 2014
Date Written: November 21, 2014
In this study, we examine how idiosyncratic risk is correlated with a wide array of anomalies, including asset growth, book-to-market, investment-to-assets, momentum, net stock issues, size, and total accruals, in international equity markets. We use zero-cost trading strategy and multifactor models to show that these anomalies produce significant abnormal returns. The abnormal returns vary dramatically among different countries and between developed and emerging countries. We provide strong evidence to support the limits of arbitrage theory across countries by documenting a positive correlation between idiosyncratic risk and abnormal return. It suggests that the existence of these well-known anomalies is due to idiosyncratic risk. In addition, we find that idiosyncratic risk has less impact on abnormal return in developed countries than emerging countries. Our results support the mispricing explanation of the existence of various anomalies across global markets.
Keywords: Anomalies, Idiosyncratic Risk, International Equity Markets, Limits of Arbitrage
JEL Classification: G12, G15
Suggested Citation: Suggested Citation