Christian Walkshäusl

The Alternative Three-Factor Model: An Alternative beyond US Markets?

We investigate the performance of the alternative three‐factor model across markets. The important US evidence of Chen et al. (2010) in favour of the alternative model does not translate to a test setting using data from 40 non‐US stock markets. The three‐factor model of Fama and French provides persistently a better description of average returns. Our analysis is robust across developed and emerging markets, robust to alternative measures of investment and profitability, to seasonality effects, to size‐segmented subsamples and subperiods, to various test assets, and to the two‐stage cross‐section regression approach to test for priced factors.

International Low-Risk Investing

This article comprehensively examines the performance, investment behavior, and co-movement of minimum-volatility, low-volatility, and low-beta strategies in international markets. First, the authors identify the significant overweighting of non-cyclical stocks from the consumer staples and utilities sectors, relative to the market, as one of the main, industry-specific return drivers of all low-risk strategies. Second, minimum-volatility, low-volatility, and low-beta strategies produce similarly substantial and statistically significant CAPM and three-factor model alphas in the segments of developed markets and emerging markets over the complete sample period, before and after the recent financial crisis. However, during the crisis, there was no significant outperformance, though low-risk strategies could keep risk down. All low-risk strategies share general commonalities with small-cap and value strategies, except in the European market, where they resemble growth strategies. Third, minimum-volatility, low-volatility, and low-beta strategies generally exhibit large and significant co-movements across and within markets. The authors do not find compelling evidence that one strategy generally dominates another. They conclude that minimum-volatility, low-volatility, and low-beta strategies are equally beneficial for participating in low-risk investing around the world.

Islamic Equity Investing: AlternativePerformance Measures and Style Analysis

We examine the performance of Islamic equity indices in comparison to their conventional market benchmarks around the world. First, using a variety of alternative performance measures based on, e.g., lower partial moments, drawdown, and value at risk, we document that Islamic indices outperform in developed markets, while they tend to underperform in emerging markets. Second, the style analysis reveals that Islamic indices in developed markets exhibit a strong growth-orientation in their investment behavior, while they show a substantial large cap bias in emerging markets. Finally, the significant overweighting of stocks from the energy and materials sectors relative to the market is identified as one of the main performance drivers of Islamic indices.

The Enterprise Multiple Investment Strategy: International Evidence

The enterprise multiple (EM) predicts the cross section of international returns. The return predictability of EM is similarly pronounced in developed and emerging markets and likewise strong among small and large firms. An international portfolio of low-EM firms outperforms a portfolio of high-EM firms by about 1% per month. The EM value premium is individually significant for the majority of countries, remains largely unexplained by existing asset pricing models, is robust after controlling for comovement with the respective U.S. premium, and is highly persistent for up to 5 years after portfolio formation, making it a promising strategy for investors.

The Price of Faith: Performance, Bulland Bear Markets, and Screening Effectsof Islamic Investing Around the Globe

In recent years, Islamic investing has emerged as a dynamic and quickly growing segment of the worldwide financial services industry. This article extends the international evidence to a much broader sample of 155 indices around the world. We contribute to the literature in several ways. First, using the Sharpe ratio, the CAPM, and the four-factor model, we find no evidence of an out- or underperformance of Islamic indices. Also, Islamic investing tends to have a growth and positive momentum bias. Both insights reconfirm results of previous studies. Second, we reexamine the performance of Islamic indices in bull and bear markets. Our evidence reverses prior results in the literature employing a different sample period. We interpret the evidence as Islamic screens not affecting unconditional performance through the cycle, but affecting performance conditional on the cycle in a manner which is, however, not easy to forecast. This is the price of Islamic investing bearing an unforeseeable chance or risk depending on the market climate. Third, we analyze the influence of screening methods on the performance of Islamic indices suggesting that there is no significant difference between Islamic screens and their performance.

Dissecting the Performance of Socially Responsible Firms

High-rated ESG (environmental, social, governance) firms do not outperform low-rated ESG firms in international markets. However, ESG-rated firms in general outperform unrated firms after controlling for firm size, book-to-market ratio, momentum, operating profitability, and investment. The following explanations are provided for these observations. First, though higher ESG ratings predict higher operating profitability and lower investments, these positive return-generating firm characteristics are not priced within the universe of ESG-rated firms, causing the insignificant return difference between high-rated and low-rated ESG firms. Second, the positive excess returns of ESG-rated firms over unrated firms reflect price corrections arising from the reversal of investors’ expectation errors concerning the impact of ESG characteristics on the firm’s future fundamental performance and are therefore the outcome of mispricing.

A Reexamination of the Issuance and Investment Anomalies in International Markets

This paper reexamines the issuance anomaly suggested by McLean, Pontiff, and Watanabe (2009) and the investment anomaly proposed by Titman, Wei, and Xie (2012) in international markets. We examine 40 non-U.S. stock markets across various aggregation levels. We find that international markets, unlike the U.S. market, demonstrate the following: (i) the issuance anomaly is not pervasive because it is largely linked to financial firms; (ii) the issuance anomaly is not persistent because it depends critically on monthly updating; and (iii) the evidence based on equal-weighted returns lends support to the issuance and investment anomalies, whereas the evidence from value-weighted returns is weak.