united kingdomen

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
Factor investing debates: Do big data and AI herald a new dawn for quant?
Factor investing debates: Do big data and AI herald a new dawn for quant?
Factor investing is based on decades of publicly available empirical studies.
11-01-2021 | Insight
Has Low Volatility lost its mojo?
Has Low Volatility lost its mojo?
2020 has been a difficult year for Low Volatility investors and this year’s performance has been truly challenging, amounting to a period of soul searching.
21-12-2020 | Insight
Podcast: Why I believe the quant winter will end
Podcast: Why I believe the quant winter will end
Will value stocks make a comeback in 2021?
17-12-2020 | Podcast