Volatility Cycles of Value Stocks

Abstract

From time to time, Value portfolios may experience higher risk (relative to other portfolios) or increased tracking error. To better understand these occurrences, this paper considers the volatility cycle of Value stocks globally. Corresponding to tracking error and total risk, the volatility of both active and absolute returns is considered. It was found that high volatility in the active returns of Value stocks was closely linked with the active performance cycle of these stocks, and tended to occur during episodes in which this cycle was in the late stages of a cyclical decline. In terms of absolute returns, the volatility of Value stocks (relative to other stocks) was observed to be more closely associated with the overall stock market cycle, being low during market peaks and high during market troughs.

Keywords: Value Stocks, Volatility Cycles

JEL Classification: G11