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Is the relationship between risk and return positive or negative?

Is the relationship between risk and return positive or negative?

16-11-2016 | From the field

This paper challenges the earlier work of Fu (2009). He claims to find a positive empirical relationship between risk and return using a sophisticated (EGARCH) idiosyncratic volatility measure for risk. Fu’s result flies directly in the face of the large number of studies that find strong evidence for a low-volatility anomaly.

  • David Blitz
    David
    Blitz
    Head Quantitative Equities Research

Guo, Kassa and Ferguson resolve this inconsistency by showing that the findings of Fu (2009) can be fully explained by a serious flaw in his research methodology, namely look-ahead bias, i.e. the use of data that would not have been available during the period being analyzed. This example illustrates the importance of studies that attempt to validate the findings of others and of conducting out-of-sample tests, even for studies that have been published in top academic journals.

From the field
From the field

Our researchers publish many whitepapers based on their own empirical studies; they also follow quantitative research done by others. Head of Quant Equities Research David Blitz comments on notable external papers.

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