Low-Volatility Investing

Journal of Index Investing, vol. 4, no. 2, Fall 2013

Posted: 8 Feb 2017

See all articles by Jason C. Hsu

Jason C. Hsu

Rayliant Global Advisors; Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business

Feifei Li

Research Affiliates, LLC

Date Written: November 1, 2013

Abstract

It is well established that stocks with lower price fluctuations tend to outperform riskier ones. This article reviews plausible explanations for the low volatility anomaly and reproduce the performance of low volatility strategies in different market environments as well as in different geographical applications. We further attribute the outperformance by decomposing the excess returns of low volatility strategies into well-known sources of equity factor premiums. We find that standard long-only low volatility strategies capture not just the low volatility premium, but, in many cases, also rely on other premiums. Additionally, we illustrate the benefit of incorporating low volatility equity strategies in an asset allocation exercise; the inclusion of low volatility strategies can significantly expand the efficient frontier and improve the resulting portfolio’s overall risk/return profile.

Suggested Citation

Hsu, Jason C. and Li, Feifei, Low-Volatility Investing (November 1, 2013). Journal of Index Investing, vol. 4, no. 2, Fall 2013. Available at SSRN: https://ssrn.com/abstract=2913306

Jason C. Hsu

Rayliant Global Advisors ( email )

Hong Kong

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

HOME PAGE: http://www.jasonhsu.org

University of California, Los Angeles - Anderson School of Business

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Feifei Li (Contact Author)

Research Affiliates, LLC ( email )

620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8753 (Phone)
949-325-8953 (Fax)

HOME PAGE: http://researchaffiliates.com/index.htm

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