Stability is the Risk Dimension of Equity Style

Abstract

This study tests the relative ability of the Russell Stability Style Indexes to identify company risk. Three forward-looking measures serve as risk proxies: I/B/E/S analyst earnings forecast dispersion, S&P company credit rating, and company expected life—a model-based statistic developed by Northfield Information Services. These measures have low mutual correlation and appear to provide a robust representation of risk at the company level. The factor alternatives to stability tested include beta, volatility, valuation, momentum, size, and quality. Low- and high-risk company samples are constructed for all measures. Forecast dispersion tests are based on differences in sample identification and misidentification rates. Credit rating and expected life tests are based on differences in sample averages. Stability is found to consistently do best at identifying company risk. Almost all results are highly statistically significant. U.S. and global ex-U.S. markets are tested separately. The sample covers the period from 1996 to 2011 and comprises 39,577 company-year observations.