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A five factor approach to the low volatility anomaly : an empirical study of the Norwegian stock market

Rogdeberg, Paal Brimsø; Økland, Sturle Råheim
Master thesis
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http://hdl.handle.net/11250/2561270
Utgivelsesdato
2018
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Samlinger
  • Master Thesis [3749]
Sammendrag
In this thesis, we construct the Fama-French five-factor model (2015a) for the Norwegian stock

market in order to examine the existence of the low volatility anomaly. We estimate risk as

idiosyncratic volatility relative to the Fama-French three-factor model (1993) and total

volatility defined as a stock’s standard deviation with a trailing window of 24 months. Stocks

are then sorted into value- and equally weighted quintile portfolios based on both risk

measurements individually. Further, the excess portfolio returns are regressed on the Fama and

French five-factor model to control for the systematic risk factors; market, size, value, operating

profitability and investment. This lets us examine the existence of the low volatility anomaly

by looking at monthly excess returns, Sharpe (1966) ratios and alphas for each of the quintile

portfolios. We are unable to prove the existence of the anomaly through excess returns alone

as we find a positive, but statistically insignificant, difference in excess return between the

lowest and highest quintile portfolio. However, we are able to document the anomaly through

the alphas. Regardless of volatility measurement and weighting scheme, we find statistically

significant positive differences in alphas between the lowest and highest quintile portfolios. Our

results are robust after controlling for different measurements of idiosyncratic volatility,

subsamples, filtering process and return requirements. This leads us to the conclusion that the

low volatility anomaly is present in the Norwegian stock market in the period August 1993 to

December 2017.

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