A Study on the Existence of a Low Idiosyncratic Volatility Premium on the Cross-section of Share Returns on the JSE
Year: 2021
Type: dissertation
Abstract: As one of the renowned anomalies in modern investment theory, the low idiosyncratic volatility anomaly may be the most bewildering and captivating of them all. The anomaly defies the traditional asset pricing theories of modern portfolio theory, which state the fundamental principle that high-risk portfolios are compensated for with higher expected returns. This study determined if the low idiosyncratic volatility premium is present on the cross-section of share returns of the JSE. 12-, 36- and 60-month volatility estimation periods were used in this study to determine if this has any significant effect on share returns. A relevant 26-year sample period from January 1994 to December 2019 was employed. In examining the CAPM OLS regression results utilising the 60-month idiosyncratic volatility estimation period, statistically significant evidence was found to support the alternative hypothesis of a low idiosyncratic volatility anomaly on the cross-sectional returns on the JSE. These findings are supported by a statistically significant alpha for five of the six portfolios examined and clearly indicate the superior performance of the low volatility portfolio in contrast to the high idiosyncratic volatility portfolios. These findings of the 60-month CAPM regression analysis provide clear evidence of a low idiosyncratic volatility anomaly and reject the null hypothesis that there is no statistically significant evidence in favour of a low idiosyncratic volatility anomaly on the cross-section of share returns on the JSE after estimating volatility utilising a 60-month volatility estimation period.
Author: Miguel Nogueira
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
Funder: University of South Africa
OpenAlex ID: W3194622930