Stock Return Volatility, Operating Performance and Stock Returns: International Evidence on Drivers of the 'Low Volatility' Anomaly

61 Pages Posted: 17 Oct 2012 Last revised: 14 Jan 2013

See all articles by Tanuj Dutt

Tanuj Dutt

Nuvest Capital

Mark Humphery-Jenner

UNSW Business School; Financial Research Network (FIRN)

Date Written: 2013

Abstract

This study highlights the link between stock return volatility, operating performance, and stock returns. Prior studies suggest that there is a ‘low volatility’ anomaly, where firms with a low stock return volatility out-perform firms with a high stock return volatility. This paper confirms that low volatility stocks earn higher returns than high volatility stocks in emerging markets and developed markets outside of North America. We also show that low volatility stocks have higher operating returns and this might explain why low volatility stocks earn higher stock returns. These results provide a partial explanation for the ‘low volatility effect’ that is independent from the existence of market anomalies or per se inefficiencies that might otherwise drive a low volatility effect. We emphasize the importance of controlling for stock return volatility when analyzing operating performance and stock performance.

Keywords: Portfolio Management, Volatility, Operating Performance, Emerging Markets

JEL Classification: G11, G12

Suggested Citation

Dutt, Tanuj and Humphery-Jenner, Mark, Stock Return Volatility, Operating Performance and Stock Returns: International Evidence on Drivers of the 'Low Volatility' Anomaly (2013). Journal of Banking and Finance, 2013, Vol 37, No 3, pp 999-1017; UNSW Australian School of Business Research Paper No. 2012 BFIN 14. Available at SSRN: https://ssrn.com/abstract=2162854 or http://dx.doi.org/10.2139/ssrn.2162854

Tanuj Dutt

Nuvest Capital ( email )

Mark Humphery-Jenner (Contact Author)

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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