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Not only high-volatility stocks underperform

Not only high-volatility stocks underperform

02-11-2016 | From the field

One of the explanations for the low-volatility anomaly is that stocks with lottery-like characteristics (a small chance of experiencing a large positive payoff) are overpriced. This paper finds a similar result for stock options. The authors find that the degree of lottery-like features can explain differences in expected option returns between 10% and 50% per week.

  • David Blitz
    David
    Blitz
    Head Quantitative Equities Research

One of the explanations for the low-volatility anomaly is that stocks with lottery-like characteristics (a small chance of experiencing a large positive payoff) are overpriced. This paper finds a similar result for stock options. The authors find that the degree of lottery-like features can explain differences in expected option returns between 10% and 50% per week.

The main variables used to measure lottery characteristics are the underlying stock volatility and the moneyness (out-of-the-money versus in-the-money) of an option. We can conclude that the low-risk anomaly is not limited to the stock and corporate bond markets, but is also strongly present in option markets.

From the field
From the field

Our researchers publish many whitepapers based on their own empirical studies; they also follow quantitative research done by others. Head of Quant Equities Research David Blitz comments on notable external papers.

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