Low-Volatility Cycles: The Influence of Valuation and Momentum on Low-Volatility Portfolios
Florida Atlantic University - Department of Finance
Lawrence Edward Kochard
University of Virginia (UVA), Investment Management Company
Rodney N Sullivan
AQR Capital Management
University of Virginia - Investment Management Company
December 15, 2014
Financial Analysts Journal, Forthcoming
Research showing that the lowest risk stocks tend to outperform the highest risk stocks over time has led to rapid growth in so-called low-risk equity investing in recent years. We examine the performance of the low-risk strategy previously considered in the literature and of a beta-neutral low-risk strategy more relevant to practice. We demonstrate that the historical performance of low risk investing, like any quantitative investment strategy, is time-varying. We find that both of our low-risk strategies exhibit dynamic exposure to the well-known value, size, and momentum factors and appear to be influenced by the overall economic environment. Our results suggest time-variation in the performance of low-risk strategies is likely influenced by the approach to constructing the low-risk portfolio strategy and by the market environment and associated valuation premia.
Number of Pages in PDF File: 34
Keywords: idiosyncratic risk, asset pricing, low-volatility anomaly, arbitrage, asset pricing
JEL Classification: C31, G12, G14
Date posted: August 16, 2013 ; Last revised: December 18, 2014
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