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http://ssrn.com/abstract=2055431
 
 

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Low Risk Stocks Outperform within All Observable Markets of the World


Nardin L. Baker


Guggenheim Investments

Robert A. Haugen


Haugen Custom Financial Systems

April 27, 2012


Abstract:     
This article provides global evidence supporting the Low Volatility Anomaly: that low risk stocks consistently provide higher returns than high risk stocks. This study covers 33 different markets during the time period from 1990-2011. (Two previous studies by Haugen & Heins (1972) and Haugen & Baker (1991) show the same negative payoff to risk in time periods 1926-1970 and 1970-1990.) The procedure for our study is intentionally simple, transparent and easily replicable. Our samples include non-survivors.

We look at an international universe of stocks beginning with the first month of 1990 until December 2011; we compute the volatility of total return for each company in each country over the previous 24 months. Stocks in each country are ranked by volatility and formed into deciles. In the total universe and in each individual country low risk stocks outperform, the relationship with respect to Sharpe ratios is even more impressive.

We believe this anomaly is caused primarily by agency issues, namely the compensation structures and internal stock selection processes at asset management firms which lead institutional investors on average to hold more volatile stocks. The article also addresses the implications for how corporate finance managers make capital investment decision in light of this evidence. The evidence presented here dethrones both CAPM and the Efficient Market Hypothesis.

Number of Pages in PDF File: 22

Keywords: Minimum Volatility, Minimum Variance, Low Volatility, Inefficient Market

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Date posted: May 10, 2012 ; Last revised: August 15, 2012

Suggested Citation

Baker, Nardin L. and Haugen , Robert A., Low Risk Stocks Outperform within All Observable Markets of the World (April 27, 2012). Available at SSRN: http://ssrn.com/abstract=2055431 or http://dx.doi.org/10.2139/ssrn.2055431

Contact Information

Nardin L. Baker
Guggenheim Investments ( email )
500 Boylston
13th Floor
Boston, MA 02116
United States
617.859.4651 (Phone)
HOME PAGE: http://guggenheimpartners.com/
Robert A. Haugen (Contact Author)
Haugen Custom Financial Systems ( email )
128 W. 14th Street
Suite 201
Durango, CO 81301
United States
(970) 259-9512 (Phone)
HOME PAGE: http://www.haugensystems.com
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