The Volatility Effect Revisited

27 Pages Posted: 26 Aug 2019

See all articles by David Blitz

David Blitz

Robeco

Pim van Vliet

Robeco Asset Management - Quantitative Investing

Guido Baltussen

Erasmus University Rotterdam (EUR); Robeco Asset Management - Quantitative Investing

Date Written: August 26, 2019

Abstract

High-risk stocks do not have higher returns than low-risk stocks in all major stock markets. This paper provides a comprehensive overview of this low-risk effect, from the earliest asset pricing studies in the nineteen seventies to the most recent empirical findings and interpretations since. Volatility appears to be the main driver of the anomaly, which is highly persistent over time and across markets, and which cannot be explained by other factors such as value, profitability, or exposure to interest rate changes. From a practical perspective we argue that low-risk investing requires little turnover, that volatilities are more important than correlations, that low-risk indices are suboptimal and vulnerable to overcrowding, and that other factors can be efficiently integrated into a low-risk strategy. Finally, we find little evidence that the low-risk effect is being arbitraged away, as many investors are either neutrally positioned, or even on the other side of the low-risk trade.

Keywords: low risk, low volatility, low beta, minimum variance, anomaly, factor investing, smart beta, low-volatility investing

JEL Classification: G11, G12, G14

Suggested Citation

Blitz, David and van Vliet, Pim and Baltussen, Guido, The Volatility Effect Revisited (August 26, 2019). Available at SSRN: https://ssrn.com/abstract=3442749 or http://dx.doi.org/10.2139/ssrn.3442749

David Blitz (Contact Author)

Robeco ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Pim Van Vliet

Robeco Asset Management - Quantitative Investing ( email )

Rotterdam, 3011 AG
Netherlands

Guido Baltussen

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Robeco Asset Management - Quantitative Investing ( email )

Rotterdam, 3011 AG
Netherlands

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