Is There a Low-Risk Anomaly Across Countries?

Abstract

The aim of this paper is to examine country-level parallels to the stock-level low-risk anomaly. The inter-market variation in returns do not follow the intra-market patterns. The country-level returns are positively related to standard deviation, value at risk, and idiosyncratic volatility, although the effect is largely explained by cross-national value, size and momentum effects. The risk-return links seem stronger for idiosyncratic risk and almost non-existent for systematic risk (market beta). Furthermore, an additional sorting on value at risk can markedly improve the performance of country-level size and value strategies. The investigations are based on a cross-section of 78 national stock markets for years 1999-2014.

Keywords: low risk anomaly, beta, standard deviation, value at risk, idiosyncratic volatility, inter-market effects, cross-section of returns, factor returns, international diversification, country selection strategies, factor investing

JEL Classification: G11, G12, G15