switzerlandde
Surprising results of lower volatility equities in emerging markets

Surprising results of lower volatility equities in emerging markets

01-05-2013 | Research

Emerging markets have become increasingly important to equity investors due to their fast growing economies. But what is the relationship between risk and return in these markets? Answer: it is flat or even negative. Empirical results show that the volatility effect - long-term equity returns at distinctly lower downside risk - is significant, robust and distinct.

  • David Blitz
    David
    Blitz
    Chief Researcher
  • Pim  van Vliet, PhD
    Pim
    van Vliet, PhD
    Lead Portfolio Manager Conservative Equities

Speed read

  • A significant, robust and distinct volatility effect exists within emerging markets.
  • This volatility effect is evident across countries, large caps and longer holding periods.
  • It appears to be growing stronger over time.
  • The findings are consistent with the hypothesis that benchmark-driven institutional investing contributes to the volatility effect.

Risk return relationship is flat or negative

We examined the empirical relationship between risk and return in emerging equity markets and found that it is flat, or even negative. This is inconsistent with theoretical models such as the CAPM, which predict a positive relationship. However, our findings are consistent with the results of studies which have previously examined the empirical relationship between risk and return in the US and other developed equity markets.

These findings are stronger, when volatility instead of beta, is used to measure risk. Specifically, a monthly rebalanced top-minus-bottom quintile hedge portfolio based on the past three years volatility exhibits a negative raw return spread of -4.4 percent per annum over our 1989-2010 sample period. Adjusted for differences in market beta, this amounts to a statistically significant negative alpha spread of -8.8 percent. The alpha spread remains large and significant after also controlling for size, value and momentum effects. In line with other studies on the volatility effect, we observe that the negative alpha of the most volatile stocks is greater than the positive alpha of the least volatile stocks.

Erhalten Sie regelmäßig aktuelle Informationen zu Factor Investing.
Erhalten Sie regelmäßig aktuelle Informationen zu Factor Investing.
Anmelden

Findings robust across countries, large caps, longer holding periods

The paper shows that the findings are robust across countries. As well as reporting results for the broad emerging markets universe, we report results for individual countries. It is also evident in a universe of large-cap only stocks; for example, when the 50% of our sample containing the smallest stocks is excluded. The results of this robustness test remove concerns that the volatility effect is mainly concentrated in small illiquid stocks.

Furthermore, it is persistent and significant in longer holding periods. Although the alpha spread drops, it is still economically and statistically significant. Besides the one month holding period, we also looked at results for 6 months, 1,2,3,4 and 5 years. This disproves the theory that the volatility effect is only a short-term characteristic.

Together with the volatility factor premium, we looked at the presence of other factor premiums. We found clear evidence of size, value and momentum premiums in emerging markets.

Volatility effect strengthened over time

The volatility effect also appears to have strengthened over time, which might be related to the increase in the number of benchmark-driven investors. Participation has grown, because of the increased popularity of emerging-market investments and the liberalization of capital markets. International, benchmark-driven investors - unlike domestic investors - do not focus on absolute risk. Instead they focus on risk compared to a benchmark, such as the MSCI Emerging Markets. Specifically, the alpha spread amounts to 3.1 percent in the first half of our sample period (1989-1999), versus -14.4 percent during the second half of our sample period (2000-2010).

The results for emerging markets are in line with results for developed markets. And they also concur with the ‘limits to arbitrage’ hypothesis: due to restrictions that are placed on funds that would ordinarily be used by rational traders to away pricing inefficiencies, prices may remain in a non-equilibrium state for protracted periods of time.

Low correlation between volatility effects in emerging and developed markets

We find low correlations between the volatility effects in emerging and developed equity markets: 0.26 with the US, 0.19 with Europe and 0.24 with Japan. For investors, the practical implication of these correlation levels is that significant diversification benefits may be achieved by exploiting the volatility effect in multiple markets simultaneously.

These low correlations do not support a common-factor explanation: the possibility that the volatility effect might reflect a global systematic risk factor. This is something that cannot be eliminated through diversification and therefore commands returns in excess of the risk free rate.

Research method

At the end of each month between December 1988 and December 2010, emerging market stocks were sorted into five portfolios, according to volatility. The top quintile contained the stocks with the highest risk and the bottom quintile, the stocks with the lowest risk. The universe was defined as the equally-weighted portfolio of all stocks in the S&P/IFC Investable Emerging Markets Index. All portfolios were equally weighted and constructed in a country neutral manner. We next calculated portfolio returns in US dollars over the subsequent month and then repeated this process. After adjusting for market beta, the difference in returns between the top and the bottom ranked quintile portfolios is the alpha spread. A negative alpha spread means that less volatile stocks have higher risk-adjusted returns. Portfolios are also based on beta and other factors (size, value and momentum).

Leave your details and download the report

Disclaimer

Dieser Bericht ist für Nutzer aus Ländern, in denen das Anbieten ausländischer Finanzdienstleistungen nicht gestattet ist, wie z. B. für US-Personen, nicht verfügbar.

Ihre Daten werden nicht an Dritte weitergeben. Diese Informationen richten sich ausschließlich an professionelle Anleger. Alle Anfragen werden überprüft.

Logo

Zugangsbeschränkung / Haftungsausschluss

Die auf diesen Seiten enthaltenen Informationen dienen Marketingzwecken und sind ausschliesslich für (i) qualifizierte Anleger gemäss dem Schweizer Bundesgesetz über die kollektiven Kapitalanlagen vom 23. Juni 2006 („KAG“), (ii) Professionelle Kunden gemäss Anhang II der Richtlinie über Märkte für Finanzinstrumente (2014/65/EU; „MiFID II“) mit Sitz in der Europäischen Union oder im Europäischen Wirtschaftsraum mit einer entsprechenden Lizenz zur Erbringung von Vertriebs- / Angebotshandlungen im Zusammenhang mit Finanzinstrumenten oder für (iii) solche, die hiermit aus eigener Initiative entsprechende Informationen zu spezifischen Finanzinstrumenten erfragen und als professionelle Kunden qualifizieren.

Die Fonds haben ihren Sitz in Luxemburg oder den Niederlanden. Die ACOLIN Fund Services AG, Postanschrift: Affolternstrasse 56, 8050 Zürich, agiert als Schweizer Vertreter der Fonds. UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich, Postanschrift: Europastrasse 2, P.O. Box, CH-8152 Opfikon, fungiert als Schweizer Zahlstelle. Der Prospekt, die Key Investor Information Documents (KIIDs), die Satzung, die Jahres- und Halbjahresberichte der Fonds sind auf einfache Anfrage hin und kostenlos im beim Schweizer Vertreter ACOLIN Fund Services AG erhältlich. Die Prospekte sind auch über die Website www.robeco.ch verfügbar.

Einige Fonds, über die Informationen auf dieser Website angezeigt werden, fallen möglicherweise nicht in den Geltungsbereich des KAG und müssen daher nicht über eine entsprechende Genehmigung durch die Eidgenössische Finanzmarktaufsicht FINMA verfügen. Einige Fonds sind in Ihrem Wohnsitz- / Sitzstaat möglicherweise nicht verfügbar. Bitte überprüfen Sie den Registrierungsstatus in Ihrem jeweiligen Wohnsitz- / Sitzstaat. Um die in Ihrem Land registrierten Produkte anzuzeigen, gehen Sie bitte zur jeweiligen Länderauswahl, die auf dieser Website zu finden ist, und wählen Sie Ihr Wohnsitz- / Sitzstaat aus.

Weder Informationen noch Meinungen auf dieser Website stellen eine Aufforderung, ein Angebot oder eine Empfehlung zum Kauf, Verkauf oder einer anderweitigen Verfügung eines Finanzinstrumentes dar. Die Informationen auf dieser Webseite stellen keine Anlageberatung oder anderweitige Dienstleistung der Robeco Switzerland Ltd dar. Eine Investition in ein Produkt von Robeco Switzerland Ltd sollte erst erfolgen, nachdem die entsprechenden rechtlichen Dokumente wie Verwaltungsvorschriften, Prospekt, Jahres- und Halbjahresberichte konsultiert wurden.

Durch Klicken auf "Ich stimme zu" bestätigen Sie, dass Sie resp. die von Ihnen vertretene juristische Person eine der oben genannten Kategorien von Adressaten fallen und dass Sie die Nutzungsbedingungen für diese Website gelesen, verstanden und akzeptiert haben.

Nicht Zustimmen