The Factor Risk in Low-Risk Anomalies

55 Pages Posted: 13 Nov 2019 Last revised: 11 Nov 2021

See all articles by Sina Ehsani

Sina Ehsani

Northern Illinois University

Date Written: November 10, 2021


The low variance (LV) strategy always bets against the volatile leg of common factor-portfolios. The risk of the strategy, measured by factor exposures, is thus perfectly predictable based on the status of factor portfolio variances during the formation period. I find that the strategy earns alpha only when traders have to bear major factor risk to arbitrage it away. These results are consistent with models that rationalize anomalies by arbitrageurs reluctance to eliminate mispricing due to factor risk aversion. I use the framework to analyze the sources of risk and return to popular volatility trading strategies and propose a new trading strategy that uses time-series factor data to manage the variance strategy in the cross-section.

Keywords: Risk Return Trade-off, Volatility Effect, Variance Anomaly, Factor Risk

JEL Classification: G11, G12, G17

Suggested Citation

Ehsani, Sina, The Factor Risk in Low-Risk Anomalies (November 10, 2021). Available at SSRN: or

Sina Ehsani (Contact Author)

Northern Illinois University ( email )

Chicago, IL 60115
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics