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A Tale of Two Anomalies: Higher Returns of Low-Risk Stocks and Return Seasonality

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  • Christopher Fiore
  • Atanu Saha

Abstract

Prior studies have shown that low beta and low volatility stocks earn higher average returns than high beta and high volatility stocks, contradicting the prediction of the capital asset pricing model and the fundamental relationship between risk and return. In this paper, we demonstrate that this phenomenon is driven by the seasonality of stock returns. We show that the risk-return tradeoff does hold in the nonsummer months, and that switching to a portfolio of low-risk stocks in summer outperforms—both in terms of absolute and in risk-adjusted returns—buy and hold strategies as well as the Sell in May strategy of switching to treasury bills in summer.

Suggested Citation

  • Christopher Fiore & Atanu Saha, 2015. "A Tale of Two Anomalies: Higher Returns of Low-Risk Stocks and Return Seasonality," The Financial Review, Eastern Finance Association, vol. 50(2), pages 257-273, May.
    • Handle: RePEc:bla:finrev:v:50:y:2015:i:2:p:257-273
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    File URL: http://hdl.handle.net/10.1111/fire.12066
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    Citations

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    Cited by:

    1. Wang, Wenzhao & Duxbury, Darren, 2021. "Institutional investor sentiment and the mean-variance relationship: Global evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 415-441.
    2. Bradrania, Reza & Veron, Jose Francisco, 2023. "The beta anomaly in the Australian stock market and the lottery demand," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    3. Huarng, Kun-Huang, 2016. "Identifying regime switches using causal recipes," Journal of Business Research, Elsevier, vol. 69(4), pages 1498-1502.
    4. Wang, Wenzhao, 2018. "Investor sentiment and the mean-variance relationship: European evidence," Research in International Business and Finance, Elsevier, vol. 46(C), pages 227-239.
    5. Lee, King Fuei, 2021. "An Anomaly within an Anomaly: The Halloween Effect in the Long-term Reversal Anomaly," MPRA Paper 110859, University Library of Munich, Germany.
    6. Zou, Fei & Huang, Lingyu & Ghaemi Asl, Mahdi & Delnavaz, Mohammad & Tiwari, Sunil, 2023. "Natural resources and green economic recovery in responsible investments: Role of ESG in context of Islamic sustainable investments," Resources Policy, Elsevier, vol. 86(PA).
    7. Degenhardt, Thomas & Auer, Benjamin R., 2018. "The “Sell in May” effect: A review and new empirical evidence," The North American Journal of Economics and Finance, Elsevier, vol. 43(C), pages 169-205.
    8. Benjamin R. Auer, 2019. "Does the strength of capital market anomalies exhibit seasonal patterns?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(1), pages 91-103, January.
    9. Bradrania, Reza & Veron, Jose Francisco & Wu, Winston, 2023. "The beta anomaly and the quality effect in international stock markets," Journal of Behavioral and Experimental Finance, Elsevier, vol. 38(C).
    10. Tantisantiwong, Nongnuch & Halari, Anwar & Helliar, Christine & Power, David, 2018. "East meets West: When the Islamic and Gregorian calendars coincide," The British Accounting Review, Elsevier, vol. 50(4), pages 402-424.
    11. Zhang, Cherry Y. & Jacobsen, Ben, 2021. "The Halloween indicator, “Sell in May and Go Away”: Everywhere and all the time," Journal of International Money and Finance, Elsevier, vol. 110(C).

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