The Profitability of Low Volatility

22 Pages Posted: 19 Jul 2016 Last revised: 24 Jul 2017

See all articles by David Blitz

David Blitz

Robeco Quantitative Investments

Milan Vidojevic

VU University Amsterdam - Finance; Robeco Asset Management

Date Written: October 11, 2016

Abstract

Low-risk stocks exhibit higher returns than predicted by established asset pricing models, but this anomaly seems to be explained by the new Fama-French five-factor model, which includes a profitability factor. We argue that this conclusion is premature given the lack of empirical evidence for a positive relation between risk and return. We find that exposure to market beta in the cross-section is not rewarded with a positive premium, regardless of whether we control for the new factors in the five-factor model. We also observe stronger mispricing for volatility than for beta, which suggests that the low-volatility anomaly is the dominant phenomenon. We conclude that the low-risk anomaly is not explained by the five-factor model.

Keywords: low volatility, low beta, profitability, betting against beta, 5-factor model

JEL Classification: G11, G12, G14

Suggested Citation

Blitz, David and Vidojevic, Milan, The Profitability of Low Volatility (October 11, 2016). Available at SSRN: https://ssrn.com/abstract=2811144 or http://dx.doi.org/10.2139/ssrn.2811144

David Blitz (Contact Author)

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Milan Vidojevic

VU University Amsterdam - Finance ( email )

De Boelelaan 1105
Amsterdam
Netherlands

Robeco Asset Management ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

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