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The Value of Low Volatility

The Value of Low Volatility

15-05-2016 | Research

The evidence for the existence of a distinct Low Volatility effect is mounting. However, implicit exposures to the Fama–French Value factor (HML) seem to explain the performance of straightforward US Low Volatility strategies since 1963.

  • David Blitz
    David
    Blitz
    Chief Researcher

Speed read

  • Low volatility is sometimes considered as Value in disguise
  • Value fails to explain the performance of low volatility strategies
  • Value and Low Volatility are distinct phenomena
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The evidence for the existence of a distinct low volatility effect is mounting. However, implicit exposures to the Fama–French value factor (HML) seem to explain the performance of straightforward US low volatility strategies since 1963.

In this article,1 the author shows that the value effect fails to explain the performance of large-capitalization low volatility strategies pre-1963 as well as post-1984, when the Fama-French value factor itself ceased to be effective in the large-cap segment of the market. Moreover, the performance of small-capitalization low volatility strategies cannot be explained by the value effect during any period. Fama-MacBeth regressions support the existence of a low volatility effect for every subsample.

Based on these results and various other arguments, the author concludes that there is a distinct low volatility effect that cannot be explained by the value effect. The combined evidence even appears to be stronger for the low volatility effect than for the value effect.

1 Blitz, D. C., 2016, ‘The Value of Low Volatility’, The Journal of Portfolio Management.

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