Equity Anomalies and Idiosyncratic Risk Around the World

Multinational Finance Journal, Forthcoming

38 Pages Posted: 23 Nov 2014

See all articles by Steve Z. Fan

Steve Z. Fan

University of Wisconsin - Whitewater

Scott Opsal

University of Wisconsin - Whitewater

Linda Q. Yu

University of Wisconsin - Whitewater - Finance and Business Law

Date Written: November 21, 2014

Abstract

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

Fan, Steve Z. and Opsal, Scott and Yu, Linda Q., Equity Anomalies and Idiosyncratic Risk Around the World (November 21, 2014). Multinational Finance Journal, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2529224

Steve Z. Fan (Contact Author)

University of Wisconsin - Whitewater ( email )

800 W. Main Street
Whitewater, WI 53190
United States

Scott Opsal

University of Wisconsin - Whitewater ( email )

800 W. Main
Whitewater, WI 53190
United States

Linda Q. Yu

University of Wisconsin - Whitewater - Finance and Business Law ( email )

Whitewater, WI 53190
United States

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