Testing the Low-volatility Effect on Chinese A Shares

Does the low-risk stock anomaly hold for China A shares, dominated by local private investors rather than institutions and characterized by high volatility and herding? In their January 2021 paper entitled “The Volatility Effect in China”, David Blitz, Matthias Hanauer and Pim van Vliet examine the performance of low-volatility China A shares. At the end of each month, they rank these stocks into value-weighted tenths (deciles) based on volatility or market beta over the last 36 months. To ensure comparability to other widely studied factors, they then construct a volatility (VOL) factor following the Fama-French 2×3 factor portfolio construction method. To mitigate concerns about exploitability, they exclude micro-cap stocks and set size breakpoints using only large mid-cap stocks stocks. They calculate next-month excess total returns in U.S. dollars relative to the 1-month U.S. Treasury bill (T-bill) yield. For comparison, they similarly construct and measure returns for size, value, profitability, investment and momentum factor portfolios among China A shares. Using monthly total returns and monthly accounting data for all constituents of the MSCI China A Onshore Index and the  MSCI China A Onshore Investable Market Index (about 1,200 stocks per month on average) and monthly T-bill yield during November 2000 through December 2018, they find that:

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