Dissecting the Low Volatility Anomaly

33 Pages Posted: 7 Sep 2012 Last revised: 15 Aug 2013

Bradford D. Jordan

University of Kentucky - Gatton College of Business and Economics

Timothy B. Riley

University of Arkansas - Department of Finance

Date Written: August 14, 2013

Abstract

We find the low volatility anomaly is present in all but the smallest of stocks. Portfolios can be formed on either total or idiosyncratic volatility to take advantage of this anomaly, but we show measures of idiosyncratic volatility are key. Standard risk-adjusted returns suggest that there is no low volatility anomaly from 1996 through 2011, but we find this result arises from model misspecification. Caution must be taken when analyzing high volatility stocks because their returns have a nonlinear relationship with momentum during market bubbles.

Keywords: Low, Volatility, Anomaly, Idiosyncratic

Suggested Citation

Jordan, Bradford D. and Riley, Timothy B., Dissecting the Low Volatility Anomaly (August 14, 2013). Midwest Finance Association 2013 Annual Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2140054 or http://dx.doi.org/10.2139/ssrn.2140054

Bradford D. Jordan

University of Kentucky - Gatton College of Business and Economics ( email )

Lexington, KY 40506
United States
859-257-4887 (Phone)
859-257-9688 (Fax)

Timothy Brandon Riley (Contact Author)

University of Arkansas - Department of Finance ( email )

Fayetteville, AR 72701
United States

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