The Profitability of Low Volatility
22 Pages Posted: 19 Jul 2016 Last revised: 24 Jul 2017
Date Written: October 11, 2016
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: Suggested Citation