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The Volatility Effect in China

Author

Listed:
  • David Blitz

    (Robeco Quantitative Investments)

  • Matthias X. Hanauer

    (Robeco Quantitative Investments
    Technical University of Munich)

  • Pim Vliet

    (Robeco Quantitative Investments)

Abstract

This paper shows that low-risk stocks significantly outperform high-risk stocks in the local China A-share market. The main driver of this low-risk anomaly is volatility, and not beta. A Fama–French style VOL factor is not explained by the Fama–French–Carhart factors, and has the strongest stand-alone performance among all these factors. Our findings are robust across sectors and over time, and consistent with previous empirical evidence for the US and international markets. Moreover, the VOL premium exhibits excellent investability characteristics, as it involves a low turnover and remains strong when applied to only the largest and most liquid stocks. Our results imply that the volatility effect is a highly pervasive phenomenon, and that explanations should be able to account for its presence in highly institutionalized markets, such as the US, but also in the Chinese market where private investors dominate trading.

Suggested Citation

  • David Blitz & Matthias X. Hanauer & Pim Vliet, 2021. "The Volatility Effect in China," Journal of Asset Management, Palgrave Macmillan, vol. 22(5), pages 338-349, September.
    • Handle: RePEc:pal:assmgt:v:22:y:2021:i:5:d:10.1057_s41260-021-00218-0
    DOI: 10.1057/s41260-021-00218-0
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    Cited by:

    1. Ke Zhang, 2023. "Construct sparse portfolio with mutual fund's favourite stocks in China A share market," Papers 2305.01642, arXiv.org.
    2. Tsafack, Georges & Becker, Ying & Han, Ki, 2023. "Earnings announcement premium and return volatility: Is it consistent with risk-return trade-off?," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    3. Jansen, Maarten & Swinkels, Laurens & Zhou, Weili, 2021. "Anomalies in the China A-share market," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).

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    More about this item

    Keywords

    China A shares; Low risk; Low volatility; Low beta; Minimum variance; Anomaly; Value; Size; Momentum; Profitability; Investments; Smart beta; Low-volatility investing;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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