Equity Anomalies and Idiosyncratic Risk Around the World

43 Pages Posted: 28 May 2015

See all articles by Steven Fan

Steven Fan

University of Wisconsin - Whitewater

Scott Opsal

University of Wisconsin - Whitewater

Linda Yu

University of Wisconsin - Whitewater

Date Written: May 27, 2015

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, Steven and Opsal, Scott and Yu, Linda, Equity Anomalies and Idiosyncratic Risk Around the World (May 27, 2015). Multinational Finance Journal, Vol. 19, No. 1, p. 33-75, 2015. Available at SSRN: https://ssrn.com/abstract=2611047

Steven Fan (Contact Author)

University of Wisconsin - Whitewater ( email )

800 W. Main
Whitewater, WI 53190
United States

Scott Opsal

University of Wisconsin - Whitewater ( email )

800 W. Main
Whitewater, WI 53190
United States

Linda Yu

University of Wisconsin - Whitewater ( email )

800 W. Main
Whitewater, WI 53190
United States

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