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Perras, P., Reberger, A., Wagner, N. The Low-Volatility Anomaly Revisited. Credit and Capital Markets – Kredit und Kapital, 53(2), 221-244. https://doi.org/10.3790/ccm.53.2.221
Perras, Patrizia J.; Reberger, Alexander and Wagner, Niklas "The Low-Volatility Anomaly Revisited" Credit and Capital Markets – Kredit und Kapital 53.2, 2020, 221-244. https://doi.org/10.3790/ccm.53.2.221
Perras, Patrizia J./Reberger, Alexander/Wagner, Niklas (2020): The Low-Volatility Anomaly Revisited, in: Credit and Capital Markets – Kredit und Kapital, vol. 53, iss. 2, 221-244, [online] https://doi.org/10.3790/ccm.53.2.221
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The Low-Volatility Anomaly Revisited

Perras, Patrizia J. | Reberger, Alexander | Wagner, Niklas

Credit and Capital Markets – Kredit und Kapital, Vol. 53 (2020), Iss. 2 : pp. 221–244

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Article Details

Publisher Name
Duncker & Humblot GmbH
DOI
https://doi.org/10.3790/ccm.53.2.221
Language
English
Pages
24
Keywords

Author Details

Dr. Patrizia J. Perras, University of Passau, Department of Business, Economics and Information Systems

Alexander Reberger, University of Passau, Department of Business, Economics and Information Systems

Prof. Dr. Niklas F. Wagner, University of Passau, Department of Business, Economics and Information Systems

References

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  2. Baker, M./Bradley, B./Wurgler, J. (2011): Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly, Financial Analysts Journal, 67, 1, 40–54.  Google Scholar
  3. Baker, N. L./Haugen, R. A. (2012): Low Risk Stocks Outperform within All Observable Markets of the World, SSRN Working Paper.  Google Scholar
  4. Blitz, D./van Vliet, P. (2007): The Volatility Effect: Lower Risk without Lower Return, Journal of Portfolio Management, 34, 1, 102–113.  Google Scholar
  5. Blitz, D./van Vliet, P./Baltussen, G. (2019): The Volatility Effect Revisited, Journal of Portfolio Management, Quantitative Special Issue 2020 (forthcoming).  Google Scholar
  6. Buchner, A./Wagner, N. (2015): The Betting against Beta Anomaly: Fact or Fiction?, Finance Research Letters, 16, 283–289.  Google Scholar
  7. Cederburg, S./O’Doherty, M. S. (2016): Does it Pay to Bet against Beta? On the Conditional Performance of the Beta Anomaly, Journal of Finance, 71, 2, 737–774.  Google Scholar
  8. Chan, L. K. C./Karceski, J./Lakonishok, J. (1999): On Portfolio Optimization: Forecasting Covariances and Choosing the Risk Model, Review of Financial Studies, 12, 5, 937–974.  Google Scholar
  9. Clarke, R./de Silva, H./Thorley, S. (2006): Minimum-Variance Portfolios in the U.S. Equity Market, Journal of Portfolio Management, 33, 1, 10–24.  Google Scholar
  10. Denoiseux, V. (2014): Smart Beta: Building Low-Volatility Portfolios of ETFs, Journal of Index Investing, 5, 1, 127–135.  Google Scholar
  11. Dutt, T./Humpherey-Jenner, M. (2013): Stock Return Volatility, Operating Performance and Stock Returns: International Evidence on Drivers of the “Low volatility” Anomaly, Journal of Banking & Finance, 37, 3, 999–1017.  Google Scholar
  12. Fama.E. F./French, K. R. (1993): Common Risk Factors in the Returns on Stocks and Bonds, Journal of Financial Economics, 33, 1, 3–56.  Google Scholar
  13. Frahm, G./Memmel, C. (2010): Dominating Estimators for Minimum-Variance Portfolios, Journal of Econometrics, 159, 2, 289–302.  Google Scholar
  14. Frazzini, A./Pederson, L. H. (2014): Betting against Beta, Journal of Financial Economics, 111, 1, 1–25.  Google Scholar
  15. Haugen, R. A./Baker, N. L. (1991): The Efficient Market Inefficiency of Capitalization–Weighted Stock Portfolios, Journal of Portfolio Management, 17, 3, 35–40.  Google Scholar
  16. Haugen, R. A./Heins, A. J. (1975): Risk and the Rate of Return on Financial Assets: Some Old Wine in New Bottles, Journal of Financial and Quantitative Analysis, 10, 5, 775.  Google Scholar
  17. Kleeberg, J. M. (1993): Risikominimale Strategie am Aktienmarkt, Die Bank, 3, 160–164.  Google Scholar
  18. Li, X./Sullivan, R. N./Garcia-Feijóo, L. (2014): The Limits to Arbitrage and the Low-Volatility Anomaly, Financial Analysts Journal, 70, 1, 52–63.  Google Scholar
  19. Markowitz, H. (1952): Portfolio Selection, Journal of Finance, 7, 1, 77–91.  Google Scholar
  20. Soe, A. M. (2012): Low-volatility Portfolio Construction: Ranking versus Optimization, Journal of Index Investing, 3, 3, 63–73.  Google Scholar
  21. Perras, P./Wagner, N. (2019): On the Pricing of Overnight Market Risk, Empirical Economics (forthcoming).  Google Scholar
  22. Wagner, N./Wolpers, T. (2008): Vermögensanlage im Private Banking: Globale Minimum-Varianz-Strategien 1997 bis 2006, Zeitschrift für das gesamte Kreditwesen, 62, 301–305.  Google Scholar
  23. Walkshäusl, C. (2014): International Low-risk Investing, Journal of Portfolio Management, 41, 1, 45–56.  Google Scholar
  24. Ang, A./Hodrick, R./Xing, Y./Zhang, X. (2006): The Cross-Section of Volatility and Expected Returns, Journal of Finance, 61, 1, 259–299.  Google Scholar
  25. Baker, M./Bradley, B./Wurgler, J. (2011): Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly, Financial Analysts Journal, 67, 1, 40–54.  Google Scholar
  26. Baker, N. L./Haugen, R. A. (2012): Low Risk Stocks Outperform within All Observable Markets of the World, SSRN Working Paper.  Google Scholar
  27. Blitz, D./van Vliet, P. (2007): The Volatility Effect: Lower Risk without Lower Return, Journal of Portfolio Management, 34, 1, 102–113.  Google Scholar
  28. Blitz, D./van Vliet, P./Baltussen, G. (2019): The Volatility Effect Revisited, Journal of Portfolio Management, Quantitative Special Issue 2020 (forthcoming).  Google Scholar
  29. Buchner, A./Wagner, N. (2015): The Betting against Beta Anomaly: Fact or Fiction?, Finance Research Letters, 16, 283–289.  Google Scholar
  30. Cederburg, S./O’Doherty, M. S. (2016): Does it Pay to Bet against Beta? On the Conditional Performance of the Beta Anomaly, Journal of Finance, 71, 2, 737–774.  Google Scholar
  31. Chan, L. K. C./Karceski, J./Lakonishok, J. (1999): On Portfolio Optimization: Forecasting Covariances and Choosing the Risk Model, Review of Financial Studies, 12, 5, 937–974.  Google Scholar
  32. Clarke, R./de Silva, H./Thorley, S. (2006): Minimum-Variance Portfolios in the U.S. Equity Market, Journal of Portfolio Management, 33, 1, 10–24.  Google Scholar
  33. Denoiseux, V. (2014): Smart Beta: Building Low-Volatility Portfolios of ETFs, Journal of Index Investing, 5, 1, 127–135.  Google Scholar
  34. Dutt, T./Humpherey-Jenner, M. (2013): Stock Return Volatility, Operating Performance and Stock Returns: International Evidence on Drivers of the “Low volatility” Anomaly, Journal of Banking & Finance, 37, 3, 999–1017.  Google Scholar
  35. Fama.E. F./French, K. R. (1993): Common Risk Factors in the Returns on Stocks and Bonds, Journal of Financial Economics, 33, 1, 3–56.  Google Scholar
  36. Frahm, G./Memmel, C. (2010): Dominating Estimators for Minimum-Variance Portfolios, Journal of Econometrics, 159, 2, 289–302.  Google Scholar
  37. Frazzini, A./Pederson, L. H. (2014): Betting against Beta, Journal of Financial Economics, 111, 1, 1–25.  Google Scholar
  38. Haugen, R. A./Baker, N. L. (1991): The Efficient Market Inefficiency of Capitalization–Weighted Stock Portfolios, Journal of Portfolio Management, 17, 3, 35–40.  Google Scholar
  39. Haugen, R. A./Heins, A. J. (1975): Risk and the Rate of Return on Financial Assets: Some Old Wine in New Bottles, Journal of Financial and Quantitative Analysis, 10, 5, 775.  Google Scholar
  40. Kleeberg, J. M. (1993): Risikominimale Strategie am Aktienmarkt, Die Bank, 3, 160–164.  Google Scholar
  41. Li, X./Sullivan, R. N./Garcia-Feijóo, L. (2014): The Limits to Arbitrage and the Low-Volatility Anomaly, Financial Analysts Journal, 70, 1, 52–63.  Google Scholar
  42. Markowitz, H. (1952): Portfolio Selection, Journal of Finance, 7, 1, 77–91.  Google Scholar
  43. Soe, A. M. (2012): Low-volatility Portfolio Construction: Ranking versus Optimization, Journal of Index Investing, 3, 3, 63–73.  Google Scholar
  44. Perras, P./Wagner, N. (2019): On the Pricing of Overnight Market Risk, Empirical Economics (forthcoming).  Google Scholar
  45. Wagner, N./Wolpers, T. (2008): Vermögensanlage im Private Banking: Globale Minimum-Varianz-Strategien 1997 bis 2006, Zeitschrift für das gesamte Kreditwesen, 62, 301–305.  Google Scholar
  46. Walkshäusl, C. (2014): International Low-risk Investing, Journal of Portfolio Management, 41, 1, 45–56.  Google Scholar

Abstract

The present study conducts two different strategies in order to exploit the low-volatility anomaly in the U.S., the European and the German equity market. The first strategy uses quadratic optimization to calculate optimal portfolio weights. The second strategy sorts stocks into portfolio quintiles based on past realized volatility. Our main findings show that both low-volatility strategies outperform the respective benchmark market portfolio. While the effect is strongest during bull-market periods, it gets weaker during periods of market downturns. Additional results show that in the U.S. market, the low-volatility anomaly can be explained by trading volume and operating profitability. In the German market, operating profitability and the dividend yield can explain the low-volatility effect while in the European market none of these characteristics play a role in explaining the effect. Overall, our findings provide evidence that the low-volatility anomaly still is a robust phenomenon that is inherent in mature capital markets.

Table of Contents

Section Title Page Action Price
Patrizia J. Perras / Alexander Reberger / Niklas F. Wagner: The Low-Volatility Anomaly Revisited 1
Abstract 1
I. Introduction 1
II. Data and Methodology 4
III. Empirical Results 5
1. Is the Low-Volatility Effect Still Alive? 5
2. Robustness of the Anomaly across Bear- and Bull-Markets 1
3. Robustness Against Variations in the Rebalancing Frequency 1
4. Drivers of the Anomaly 1
a) Trading Volume 1
b) Size 1
c) Operating Profitability 1
d) Dividend Yield 2
IV. Conclusion 2
References 2

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