Low Risk Anomalies?
73 Pages Posted: 13 Apr 2015 Last revised: 8 Nov 2017
Date Written: October 28, 2017
This paper shows that stocks' CAPM alphas are negatively related to CAPM betas if investors demand compensation for negative skewness. Thus, high (low) beta stocks appear to underperform (outperform). This apparent anomaly merely reflects compensation for residual coskewness ignored by the CAPM. Empirically, we find that option-implied ex-ante skewness is strongly related to ex-post residual coskewness and alphas. Beta- and volatility-based low risk anomalies are largely driven by a single principal component, which is in turn largely explained by skewness. Controlling for skewness renders the alphas of betting-against-beta and -volatility insignificant.
Keywords: Low risk anomaly, skewness, risk premia, equity options
JEL Classification: G12
Suggested Citation: Suggested Citation