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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 of Quant 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

Nuestros investigadores publican multitud de informes basados en sus propios estudios empíricos; también siguen los análisis cuantitativos que hacen los demás. Comentarios de nuestro responsable de análisis cuantitativo para renta variable, David Blitz, sobre publicaciones externas de gran relevancia.

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