Low-Risk Anomalies? |
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| Authors: | PAUL SCHNEIDER CHRISTIAN WAGNER JOSEF ZECHNER |
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| Institution: | 1. Paul Schneider is at USI Lugano and SFI. Christian Wagner and Josef Zechner are at WU Vienna University of Business and Economics. This paper received the 2015 Jack Treynor Prize sponsored by the Q-Group (The Institute for Quantitative Research in Finance). We are grateful to Kevin Aretz;2. Turan Bali;3. Nick Baltas;4. Michael Brennan;5. John Campbell;6. Mikhail Chernov;7. Peter Christoffersen;8. Mathijs Cosemans;9. Andrea Gamba;10. Patrick Gagliardini;11. Christopher Hennessy;12. Christopher Hrdlicka;13. Leonid Kogan;14. Loriano Mancini;15. Miriam Marra;16. Ian Martin;17. Yoshio Nozawa;18. Lasse Pedersen;19. Paulo Rodrigues;20. Ivan Shaliastovich;21. Christian Schlag;22. Fabio Trojani;23. Rossen Valkanov;24. Pietro Veronesi;25. Arne Westerkamp;26. Paul Whelan;27. Liuren Wu;28. and participants at the American Finance Association Meetings 2017 (Chicago), the European Finance Association Meetings 2016 (Oslo), the UBS Quantitative Investment Conference 2016 (London), the Spring Seminar of the Q Group 2016 (Washington, D.C.), the Annual Conference on Advances in the Analysis of Hedge Fund Strategies 2015 (London), the IFSID Conference on Derivatives 2015 (Montreal), the SAFE Asset Pricing Workshop 2015 (Frankfurt);29. and seminar participants at Cass Business School, Dauphine, Copenhagen Business School, Hong Kong University of Science and Technology, Imperial College, Singapore Management University, Stockholm School of Economics, University of Geneva, University of Toronto (Rotman), Warwick Business School, and WU Vienna for helpful comments. Paul Schneider acknowledges support from the Swiss National Science Foundation grant “Model-Free Asset Pricing.” Christian Wagner acknowledges support from the Center for Financial Frictions (FRIC), grant no. DNRF102. We are especially indebted to Stefan Nagel and Kenneth Singleton (the Editors), two anonymous referees, and an anonymous associate editor for their extensive comments that have greatly helped to improve the paper. The authors alone are responsible for any errors and for the views expressed in the paper. We have read The Journal of Finance disclosure policy and have no conflicts of interest to 30. disclose. |
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| Abstract: | This paper shows that low-risk anomalies in the capital asset pricing model and in traditional factor models arise when investors require compensation for coskewness risk. Empirically, we find that option-implied ex ante skewness is strongly related to ex post residual coskewness, which allows us to construct coskewness factor-mimicking portfolios. Controlling for skewness renders the alphas of betting-against-beta and betting-against-volatility insignificant. We also show that the returns of beta- and volatility-sorted portfolios are driven largely by a single principal component, which in turn is explained largely by skewness. |
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