Low-risk anomalies : evidence from the Nordic equity markets

Abstract

This study examines the low-risk anomaly in Nordic equity markets, filling a gap in the literature compared to extensive research in U.S. markets. From February 2005 to March 2024, portfolios sorted by volatility, beta, and idiosyncratic volatility are analysed with rolling risk measurement periods of 36, 24, and 12 months. The study also assessed the anomaly’s behaviour across large-cap and small-cap stocks and its persistence over extended holding periods. Results confirm that low-risk portfolios outperform high-risk portfolios, achieving superior raw and risk-adjusted returns. Idiosyncratic volatility-sorted portfolios showed the strongest results, while beta-sorted portfolios performed weakest. The largest return spreads occurred with 36-month measurement periods, while shorter periods yielded weaker spreads. The anomaly is largely driven by underperformance in the short legs. For large-cap stocks, return spreads were muted, with significance only for idiosyncratic volatility portfolios. Robustness for holding periods up to 12 months underscores the anomaly’s persistence in Nordic markets.