Exploiting Low-Risk Anomaly in the Black-Litterman Framework: Evidence from South Korea

There is a low-risk anomaly in the stock markets around the world for a long time. The Korean financial market is also experiencing low-risk anomalies, and even portfolios of high-risk stocks have lost close to 70% between... [ view full abstract ]

There is a low-risk anomaly in the stock markets around the world for a long time. The Korean financial market is also experiencing low-risk anomalies, and even portfolios of high-risk stocks have lost close to 70% between 2000 and 2016. We exploit the low-risk anomaly in the Black-Litterman framework in the Korean financial market. we predict volatility of firms in Korean Stock Price Index 200(KOSPI 200) to classify stocks into high-risk and low-risk groups. The Black-Litterman portfolio has a Sharpe ratio that is about twice higher than the market portfolio.