The low volatility anomaly in Chinese equity market

Hong, Zhuoling (2023) The low volatility anomaly in Chinese equity market. [Dissertation (University of Nottingham only)]

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The most well-known anomaly in finance suggests that there is no trade- off between risk and return. The portfolio of the low volatility stocks provides better returns than the portfolio of the high volatility stocks. The existing literature offers numerous possible explanations for this anomaly. One of the studies from Bali, Cakici, and Whitelaw (2011) demonstrates that investors’ demand for lottery-like stocks is a significant driver of the low beta anomaly and in this research, they introduced a behaviour measure variable "MAX", which represents lottery characteristics. Hence, in this paper, we are going to follow Bali et al. (2011, 2017)'s research and use "MAX" to investigate the demand for lottery-type stocks in explanation of the presence this anomaly in Chinese equity market.

The investigation of our study results in the confirmation of the existence of the low beta anomaly in China and this anomaly can be explained by lottery characteristic. The accumulated excess returns over the observation period for the hedging portfolio is 80.55 percent, which indicates that investors cannot gain an additional return by taking additional risk. Furthermore, we use bivariate portfolio-level analysis and discover that after controlling for MAX effect, the abnormal return of the hedging portfolio is not statistically significant, which demonstrates that lottery demand's influence on stock returns is manifested in the low beta anomaly in China.

Item Type: Dissertation (University of Nottingham only)
Keywords: CAPM; low volatility anomaly; low beta anomaly; MAX effect; lottery effect; China
Depositing User: Hong, Zhuoling
Date Deposited: 25 Jul 2023 08:02
Last Modified: 25 Jul 2023 08:02

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