When Less Is More: Low-Risk Investing in Swedish Equities : Multifactor asset pricing test of the low-risk anomaly in the Swedish market

Sammanfattning

The low-risk anomaly is one of the most well-documented and robust anomalies in finance. However, much of the evidence for it relies on CAPM and Fama-French three-factor asset pricing tests within the United States. This thesis contributes to the literature by performing a multifactor asset pricing test on the low-risk anomaly using a combination of the Fama-French five-factor asset pricing model and AQR Capital Management’s Momentum and Quality-Minus-Junk factors in the Swedish market. I construct two low-risk factor portfolios: LMH, based on market beta, and VOL, based on monthly return volatility. The paper finds mixed evidence for the presence of the low-risk anomaly in the Swedish market. The VOL factor exhibits a statistically significant alpha across all asset pricing tests performed. The LMH factor, meanwhile, doesn’t exhibit an alpha that is statistically significant when AQR factors are included. This suggests the evidence for the low-risk anomaly isn’t robust to definition in the Swedish market. I find no empirical support for the leverage constraints hypothesis for the low-risk anomaly using a Swedish version of the TED spread. Overall, the findings indicate that evidence for the low-risk anomaly and its interpretation are methodologically and definitionally sensitive.