Low Risk Anomalies?

71 Pages Posted: 26 Oct 2016 Last revised: 11 Jan 2018

See all articles by Paul Schneider

Paul Schneider

University of Lugano - Institute of Finance; Swiss Finance Institute

Christian Wagner

WU Vienna University of Economics and Business

Josef Zechner

Vienna University of Economics and Business

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2016

Abstract

This paper shows theoretically and empirically that beta- and volatility-based low risk anomalies are driven by return skewness. The empirical patterns concisely match the predictions of our model which generates skewness of stock returns via default risk. With increasing downside risk, the standard capital asset pricing model increasingly overestimates required equity returns relative to firms' true (skew-adjusted) market risk. Empirically, the profitability of betting against beta/volatility increases with firms' downside risk. Our results suggest that the returns to betting against beta/volatility do not necessarily pose asset pricing puzzles but rather that such strategies collect premia that compensate for skew risk.

Keywords: Low risk anomaly, skewness, credit risk, risk premia, equity options

Suggested Citation

Schneider, Paul Georg and Wagner, Christian and Zechner, Josef, Low Risk Anomalies? (February 28, 2016). CFS Working Paper, No. 550. Available at SSRN: https://ssrn.com/abstract=2858933 or http://dx.doi.org/10.2139/ssrn.2858933

Paul Georg Schneider

University of Lugano - Institute of Finance ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Christian Wagner

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Josef Zechner (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien A-1019
Austria

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