Low-Volatility Cycles: The Influence of Valuation and Momentum on Low-Volatility Portfolios
34 Pages Posted: 16 Aug 2013 Last revised: 18 Dec 2014
Date Written: December 15, 2014
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: Suggested Citation