Evidence from Chinese mutual funds suggests that institutional investors are tilted to less risky stocks, implying that private investors, which dominate the local Chinese market, are over-invested in high-risk stocks and creating the anomaly. Further tests in the paper provide additional support for behavioral explanations, rather than (quasi-)rational explanations.
In our research we have also found an inverted relation between risk and return in the (previously unexplored) Chinese equity market, which once again confirms the pervasiveness and robustness of the low-risk anomaly. The Chinese edition of the book High Returns from Low Risk, by Robeco’s Pim van Vliet and Jan de Koning, contains an extra section with these results and a discussion.
1 Han, Li & Li, “Betting Against Beta: Further Evidence from China and the US”, working paper, 2018.
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