Low-Volatility Investing: Empirical Evidence of the Defensive Properties of Low Volatility Enhanced Portfolios

Posted: 30 Jun 2016 Last revised: 8 Jul 2016

See all articles by Thomas Merz

Thomas Merz

Zurich Universtity of Applied Sciences

Pawel Janus

VU University Amsterdam

Date Written: March 2, 2016

Abstract

Our study provides further insights into the evidence of excess returns of low volatility enhanced portfolios. Based on the framework presented by Campbell and Vuolteenaho (2003), we analyze through-the-cycle as well as stress periods to provide an insight into which portfolio construction technique is most beneficial in enhancing portfolio returns on a risk-adjusted basis. Analyzing a new data set from 2000 through 2015, we find that low volatility enhanced portfolios exhibit extraordinary excess returns during stressed market conditions. Empirically, we find that enhancing portfolios with low volatility building blocks produces on average an excess return between 5.6% and 17.2% for US equity and 1.8% and 16.7% for European equity portfolios during strong market corrections. We provide evidence that across different portfolio construction techniques, relative excess returns become more pronounced the more severe the market correction becomes. While equal weight techniques contribute very steadily to the overall excess return in down cycles, switching techniques show more relative outperformance towards the deeper end of market down cycles.

Keywords: factor investing, factor premia, low-volatility investing, low beta, low risk, downside properties, Calmar ratio, modified Sharpe ratio

JEL Classification: C12, G11, G12, G14

Suggested Citation

Merz, Thomas and Janus, Pawel, Low-Volatility Investing: Empirical Evidence of the Defensive Properties of Low Volatility Enhanced Portfolios (March 2, 2016). Available at SSRN: https://ssrn.com/abstract=2801534 or http://dx.doi.org/10.2139/ssrn.2801534

Thomas Merz (Contact Author)

Zurich Universtity of Applied Sciences ( email )

St.-Georgen-Platz 2
Winterthur, 8401
Switzerland

HOME PAGE: http://www.sml.zhaw.ch

Pawel Janus

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

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