Does Interest Rate Exposure Explain the Low-Volatility Anomaly?

43 Pages Posted: 30 Aug 2016 Last revised: 20 Oct 2017

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; Kempen Capital Management

Robbert Beilo

Independent

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. Depending on assumptions about the interest rate premium, interest rate exposure explains between 20\% and 80\% of the unexplained excess return. We also find that the interest rate risk premium in equity markets exhibits time variation similar to bond markets.

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

JEL Classification: G12

Suggested Citation

Driessen, Joost and Kuiper, Ivo 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 ( email )

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

Kempen Capital Management ( email )

P.O. Box 75666
Amsterdam, 1070 AR
Netherlands

Robbert Beilo

Independent

No Address Available

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