Benchmark followers amplify the low volatility effect. In our seminal paper1 on low-volatility investing, published in 2007, we argued that the anomaly might be caused by benchmark-driven investing, as this gives fund managers the incentive to over-invest in high-risk stocks.
For those who were not convinced yet, a new paper2 by Christoffersen and Simutin basically proves our point. The authors argue that in an effort to beat benchmarks, fund managers tend to increase their exposure to high-risk stocks, while aiming to maintain tracking errors around the benchmark.
They conclude that their findings support theoretical conjectures that benchmarking can lead managers to tilt their portfolio toward high-risk stocks and away from low-risk stocks, causing high-risk stocks to become overpriced and low-risk stocks to become underpriced. This is consistent with the empirical finding of a flat (or even inverted) relation between risk and return; a result which is commonly referred to as the low volatility anomaly.
1Blitz & van Vliet, “The Volatility Effect: Lower Risk Without Lower Return”, Journal of Portfolio Management, Vol. 34, No. 1, 2007, pp. 102-113.
2Christoffersen & Simutin, “On the Demand for High-Beta Stocks: Evidence from Mutual Funds”, Review of Financial Studies, Vol. 30 No. 8, 2017, pp. 2596-2620. No. 8, 2017, pp. 2596-2620.
Onze onderzoekers publiceren veel whitepapers die zijn gebaseerd op hun eigen empirische onderzoek, maar ze kijken ook naar kwantitatief onderzoek dat door anderen is gedaan. David Blitz, hoofd Quant Equities Research, vertelt over opvallende externe papers.