Low-Risk Effect: Evidence, Explanations and Approaches to Enhancing the Performance of Low-Risk Investment Strategies

Mayank Joshipura and Nehal Joshipura (2020). Low-risk effect: evidence, explanations and approaches to enhancing the performance of low-risk investment strategies. Investment Management and Financial Innovations, 17(2), 128-145. doi:10.21511/imfi.17(2).2020.11

19 Pages Posted: 23 Jun 2020

See all articles by Mayank Joshipura

Mayank Joshipura

School of Business Management, NMIMS University

Nehal Joshipura

Durgadevi Saraf Institute of Management Studies

Date Written: May 29, 2020

Abstract

The authors offer evidence for low-risk effect from the Indian stock market using the top-500 liquid stocks listed on the National Stock Exchange (NSE) of India for the period from January 2004 to December 2018. Finance theory predicts a positive risk-return relationship. However, empirical studies show that low-risk stocks outperform high-risk stocks on a risk-adjusted basis, and it is called low-risk anomaly or low-risk effect. Persistence of such an anomaly is one of the biggest mysteries in modern finance. The authors find strong evidence in favor of a low-risk effect with a flat (negative) risk-return relationship based on the simple average (compounded) returns. It is documented that low-risk effect is independent of size, value, and momentum effects, and it is robust after controlling for variables like liquidity and ticket-size of stocks. It is further documented that low-risk effect is a combination of stock and sector level effects, and it cannot be captured fully by concentrated sector exposure. By integrating the momentum effect with the low-volatility effect, the performance of a low-risk investment strategy can be improved both in absolute and risk-adjusted terms. The paper contributed to the body of knowledge by offering evidence for: a) robustness of low-risk effect for liquidity and ticket-size of stocks and sector exposure, b) how one can benefit from combining momentum and low-volatility effects to create a long-only investment strategy that offers higher risk-adjusted and absolute returns than plain vanilla, long-only, low-risk investment strategy.

Keywords: asset pricing, emerging markets, lottery effect, market efficiency, momentum, stocks, volatility effect

JEL Classification: G11, G12, G14

Suggested Citation

Joshipura, Mayank and Joshipura, Nehal, Low-Risk Effect: Evidence, Explanations and Approaches to Enhancing the Performance of Low-Risk Investment Strategies (May 29, 2020). Mayank Joshipura and Nehal Joshipura (2020). Low-risk effect: evidence, explanations and approaches to enhancing the performance of low-risk investment strategies. Investment Management and Financial Innovations, 17(2), 128-145. doi:10.21511/imfi.17(2).2020.11, Available at SSRN: https://ssrn.com/abstract=3613658

Mayank Joshipura

School of Business Management, NMIMS University ( email )

Mumbai
Mumbai
India

Nehal Joshipura (Contact Author)

Durgadevi Saraf Institute of Management Studies ( email )

S.V. Road
Mumbai, 400064
India

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