A Study on the Strategic Application of Abnormal Risk-Return Relationship

Abstract

This paper focuses on the strategic application based on the empirical results of risk-return relationship against the classical concept. Empirical analysis from domestic data, we verify that the traditional concept-‘high risk, high return’ relationship are maintained, however, we confirm the falling pattern in the highest total volatility group. Even though we implies double sorting method to control the well known systematic factor such as BM and size, we still confirm such abnormal risk-return relationship. Furthermore, we perform sub-period analysis before and after the liberalization of Korean capital market and we find such abnormal risk-return relationship is appeared after the liberalization. Based on our empirical results, we establish and verify the new benchmark that evenly allocate highest volatility portfolio to sub-volatility portfolio. Under the new benchmark, we confirm the expansion of the efficient frontier and the improvement of Sharpe ratio. We believe that our results provide an applicability research of smart beta strategy and new benchmark based on such strategy. We expect our research to be used as preliminary study to overcome the era of “new normal” and to reform the investment strategies correspond to segmentation of benchmark.

Citation

Choi, Y. and Yoon, B. (2017), "A Study on the Strategic Application of Abnormal Risk-Return Relationship", Journal of Derivatives and Quantitative Studies: 선물연구, Vol. 25 No. 3, pp. 339-367. https://doi.org/10.1108/JDQS-03-2017-B0002