Low-Volatility Cycles: The Influence of Valuation and Momentum on Low-Volatility Portfolios

34 Pages Posted: 16 Aug 2013 Last revised: 18 Dec 2014

See all articles by Luis García-Feijóo

Luis García-Feijóo

Florida Atlantic University - Department of Finance

Lawrence Edward Kochard

University of Virginia (UVA), Investment Management Company

Rodney N Sullivan

University of Virginia, Darden Graduate School of Business

Peng Wang

TIAA Institute - Covariance Capital Management

Date Written: December 15, 2014

Abstract

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.

Keywords: idiosyncratic risk, asset pricing, low-volatility anomaly, arbitrage, asset pricing

JEL Classification: C31, G12, G14

Suggested Citation

Garcia-Feijoo, Luis and Kochard, Lawrence Edward and Sullivan, Rodney N and Wang, Peng, Low-Volatility Cycles: The Influence of Valuation and Momentum on Low-Volatility Portfolios (December 15, 2014). Financial Analysts Journal, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2310353 or http://dx.doi.org/10.2139/ssrn.2310353

Luis Garcia-Feijoo

Florida Atlantic University - Department of Finance ( email )

777 Glades Rd
Boca Raton, FL 33431
United States
954-236-1239 (Phone)

Lawrence Edward Kochard

University of Virginia (UVA), Investment Management Company ( email )

Post Office Box 400215
Charlottesville, VA 22904-4215
United States

Rodney N Sullivan (Contact Author)

University of Virginia, Darden Graduate School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-243-0644 (Phone)

Peng Wang

TIAA Institute - Covariance Capital Management ( email )

1221 McKinney St. Suite 1800
Houston, TX 77010
United States

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