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 13, 2013
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 demonstrate that the historical performance of low risk investing is strikingly cyclical and driven to a large degree by swings in the relative valuation levels of low risk versus high risk stocks and also by varying appetite for momentum driven investing. We examine the performance of the low-risk strategy previously considered in the literature and of a novel beta-neutral low-risk strategy, more relevant to practice. Furthermore, we observe that the current valuation cycle nears historically high levels, which, combined with high exposure to momentum, indicates greater uncertainty in low-risk investing future outcomes.
Number of Pages in PDF File: 33
Keywords: idiosyncratic risk, asset pricing, low-volatility anomaly, arbitrage, asset pricing
JEL Classification: C31, G12, G14working papers series
Date posted: August 16, 2013 ; Last revised: June 19, 2014
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