australiaen

Low volatility anomaly

The low volatility anomaly refers to the finding that stocks exhibiting lower volatility achieve higher returns than can be explained by the efficient market theory (Capital Asset Pricing Model).

Empirical research shows low-volatility securities, because they usually fall less in down markets, tend to generate higher risk-adjusted returns over the longer term.

This counter intuitive phenomenon was first documented more than forty years ago. According to the CAPM, investors’ decisions are rational.

They reason that higher risk, in this case higher volatility, will always entail higher returns.

But in 1972, a study by outperformed in the period 1929-1971. Further research confirmed this ‘low beta effect’ for other equity markets and Robeco researchers documented a similar ‘low volatility effect‘: lower volatility stocks generate higher risk-adjusted returns.

Further academic research demonstrated that the volatility effect is growing stronger in the European, Japanese and Emerging equity markets.

See also: Low volatility factor

Quantitative investing: invisible layers surface to deliver attractive returns
Quantitative investing: invisible layers surface to deliver attractive returns
Read more
Are credit factor premiums robust to inflation?
Are credit factor premiums robust to inflation?
With inflation worries having gained momentum, we investigate how inflation has affected credit factor premiums in the past.
24-09-2021 | Insight
Seizing opportunities in emerging markets credits
Seizing opportunities in emerging markets credits
Global credit investors can no longer easily ignore emerging markets (EM) hard-currency corporate bonds.
08-09-2021 | Research
Momentum is a self-fulfilling prophecy and therein lies its strength
Momentum is a self-fulfilling prophecy and therein lies its strength
The Momentum premium arises from mistakes in human reasoning.
06-09-2021 | Insight