Does Interest Rate Exposure Explain the Low-Volatility Anomaly?

32 Pages Posted: 30 Aug 2016 Last revised: 23 Mar 2019

See all articles by Joost Driessen

Joost Driessen

Tilburg University - Center and Faculty of Economics and Business Administration; Tilburg University - Center for Economic Research (CentER)

Ivo Kuiper

Tilburg University - Center and Faculty of Economics and Business Administration; Kempen Capital Management

Korhan Nazliben

affiliation not provided to SSRN

Robbert Beilo

Tilburg University - Center and Faculty of Economics and Business Administration

Date Written: January 3, 2017

Abstract

We show that part of the outperformance of low-volatility stocks can be explained by a premium for interest rate exposure. Low-volatility stock portfolios have negative exposure to interest rates, whereas the more volatile stocks have positive exposure. Incorporating an interest rate premium explains part of the anomaly. We also find that the interest rate risk premium in equity markets exhibits time variation similar to bond markets, but that the level of the interest rate premium, as estimated from the cross-section of stocks, is much higher than the premium observed in the bond market.

Keywords: Cross-section of stock returns; Low-volatility anomaly; Interest rates; Factor model

JEL Classification: G12

Suggested Citation

Driessen, Joost and Kuiper, Ivo and Nazliben, Korhan and Beilo, Robbert, Does Interest Rate Exposure Explain the Low-Volatility Anomaly? (January 3, 2017). Available at SSRN: https://ssrn.com/abstract=2831157 or http://dx.doi.org/10.2139/ssrn.2831157

Joost Driessen

Tilburg University - Center and Faculty of Economics and Business Administration ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Ivo Kuiper (Contact Author)

Tilburg University - Center and Faculty of Economics and Business Administration ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

Kempen Capital Management ( email )

P.O. Box 75666
Amsterdam, 1070 AR
Netherlands

Korhan Nazliben

affiliation not provided to SSRN

Robbert Beilo

Tilburg University - Center and Faculty of Economics and Business Administration ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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