Low-risk anomaly: Idiosyncratic risk or return distribution

Tianyang Li and Yinzhu Li

Finance Research Letters, 2025, vol. 74, issue C

Abstract: This study examined low-risk anomalies to investigate underlying causes based on data from the Chinese stock market. The low-risk anomaly was concentrated among small firms, driven by idiosyncratic volatility(IV thereafter)11IV is the abbreviation for idiosyncratic volatility. and distribution variables (e.g., past returns). (1) The predictive power of distribution variables depended on low investor sentiment; IV exhibited persistent performance. (2) Arbitrage asymmetry explained the performance of IV. (3) Trade volume was key to pricing past returns. IV was less affected by trade volume; under high sentiment, trade volume earned significant returns among extreme winner and loser portfolios, decreasing return reversal strength.

Keywords: Low-risk anomaly; Idiosyncratic risk; Past return; Investor sentiment (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:74:y:2025:i:c:s1544612325000200

DOI: 10.1016/j.frl.2025.106755

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