Mehmet Umutlu

Idiosyncratic Volatility and Expected Returns at the Global Level

We investigate the existence and significance of a cross-sectional relation between idiosyncratic volatility and expected returns at the global level by introducing a global idiosyncratic volatility measure and globally diversified test assets. We find that the portfolios with the highest and lowest global idiosyncratic volatility don’t earn significantly different average returns, indicating the absence of a link between global idiosyncratic volatility and expected returns. This result is robust to three different samples utilized; two different asset pricing models, two different data frequencies, and an alternative idiosyncratic volatility definition used to estimate global idiosyncratic volatility; two different weighting schemes to calculate portfolio returns and after controlling for the size of the global idiosyncratic volatility sorted portfolios. It also holds for four different sub-periods and eight subsamples reflecting different states of the economy and stock markets. Our results show that global diversification is effective in stabilizing the returns of global test assets as global investors don’t require a risk premium for bearing global idiosyncratic volatility and that benefits from global diversification can be gained by diversifying across countries or across industries.

Foreign Equity Trading and Average Stock-return Volatility: FOREIGN EQUITY TRADING AND VOLATILITY

We examine whether there is a relationship between foreign equity trading and average total volatility, measured as the value-weighted average of stock-return variance in the Istanbul Stock Exchange. We employ foreign equity purchase and sale data to track changes in foreign equity trading, which not only enable us to capture effective foreign investor participation but also to observe the potential asymmetric effects of incoming and outgoing funds on the average total volatility. Consistent with the implications of the asymmetric information hypothesis, we find that net equity flow is positively associated with average total volatility. Furthermore, we show that net equity flow affects the average total volatility through the local and idiosyncratic volatilities, suggesting that foreign investors engage in the production of firm specific and market wide information.

Less pain, more gain: Volatility-adjusted residual momentum in international equity markets

ABSTRACT We offer a new type of momentum strategy — the volatility-adjusted residual momentum (VARMOM) — which is based on average past residuals scaled with their volatility. We demonstrate its application for international asset allocation within 51 country indexes and 888 industry portfolios from developed and emerging markets. The VARMOM trading strategy notably outperforms and subsumes a standard momentum strategy, delivering Sharpe ratios that are two to three times higher. The VARMOM is particularly strong across portfolios characterised by high limits to arbitrage and following bull markets, supporting the behavioural explanation of momentum. The results are robust to alternative portfolio construction methods as well as the inclusion of trading costs and control variables. They are also valid for several subperiods and subsamples.

Strategies can be expensive too! The value spread and asset allocation in global equity markets

ABSTRACT Is the value spread useful for forecasting returns on quantitative equity strategies for country selection? To test this, we examine a sample of 120 country-level equity strategies replicated within 72 stock markets for the years 1996–2017. The value spread is a powerful and robust predictor of strategy returns in the cross-section, subsuming other methods based on momentum, reversal, or seasonality. Going long (short) the strategies with the broadest (narrowest) value spread produces significant four-factor model alphas, markedly outperforming an equal-weighted benchmark of all of the strategies. The results are robust to many considerations.