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Stock Return Volatility, Operating Performance and Stock Returns: International Evidence on Drivers of the ‘Low Volatility’ Anomaly

Last Updated on 10 February, 2024 by Rejaul Karim

In the realms of financial markets explored by Tanuj Dutt and Mark Humphery-Jenner in “Stock Return Volatility, Operating Performance and Stock Returns,” a captivating interplay unfolds between stock return volatility, operating performance, and stock returns.

Published in the Journal of Banking and Finance, this 61-page exploration, supported by the UNSW Australian School of Business, intricately navigates the ‘low volatility’ anomaly. Echoing previous studies, the research affirms the phenomenon where low volatility stocks outshine their high volatility counterparts.

Spanning emerging and developed markets, excluding North America, the study unveils a crucial insight: low volatility stocks boast higher operating returns, offering a plausible explanation for their superior stock returns.

This revelation, shedding light on the ‘low volatility effect,’ underscores the necessity of considering stock return volatility when dissecting operating performance and stock performance dynamics.

Abstract Of Paper

This study highlights the link between stock return volatility, operating performance, and stock returns. Prior studies suggest that there is a ‘low volatility’ anomaly, where firms with a low stock return volatility out-perform firms with a high stock return volatility. This paper confirms that low volatility stocks earn higher returns than high volatility stocks in emerging markets and developed markets outside of North America. We also show that low volatility stocks have higher operating returns and this might explain why low volatility stocks earn higher stock returns. These results provide a partial explanation for the ‘low volatility effect’ that is independent from the existence of market anomalies or per se inefficiencies that might otherwise drive a low volatility effect. We emphasize the importance of controlling for stock return volatility when analyzing operating performance and stock performance.

Original paper – Download PDF

Here you can download the PDF and original paper of Stock Return Volatility, Operating Performance and Stock Returns: International Evidence on Drivers of the ‘Low Volatility’ Anomaly.

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Author

Tanuj Dutt
Nuvest Capital

Mark Humphery-Jenner
University of New South Wales (UNSW); UNSW Business School; Financial Research Network (FIRN)

Conclusion

In summary, this study elucidates the intricate relationship among stock return volatility, operating performance, and stock returns, shedding light on the ‘low volatility’ anomaly. Confirming the anomaly’s presence in both emerging and developed markets outside North America, the research underscores the superior returns of low volatility stocks.

Crucially, it unveils a compelling connection between low volatility stocks and higher operating returns, providing a key explanatory link for their outperformance. These findings challenge a simplistic interpretation of the ‘low volatility effect,’ emphasizing its nuanced relationship with operating performance independent of broader market anomalies or inefficiencies.

The study advocates for meticulous consideration of stock return volatility in the analysis of both operating and stock performance, contributing valuable insights to portfolio management strategies.

Related Reading:

Does Interest Rate Exposure Explain the Low-Volatility Anomaly?

Why the Low Volatility Anomaly Will Persist

FAQ

Q1: What is the main focus of the research paper by Tanuj Dutt and Mark Humphery-Jenner?

A1: The research paper explores the interplay between stock return volatility, operating performance, and stock returns, with a particular focus on the ‘low volatility’ anomaly. It aims to understand the relationship between these factors and the superior returns observed in low volatility stocks.

Q2: What key insight does the study provide regarding low volatility stocks?

A2: The study confirms the presence of the ‘low volatility’ anomaly in both emerging and developed markets outside North America. Additionally, it reveals that low volatility stocks exhibit higher operating returns, offering a plausible explanation for their superior stock returns. This insight contributes to a deeper understanding of the ‘low volatility effect.’

Q3: How does the research contribute to the understanding of the ‘low volatility effect’?

A3: The research challenges a simplistic interpretation of the ‘low volatility effect’ by highlighting the nuanced relationship between low volatility stocks and higher operating returns. It emphasizes the importance of considering stock return volatility in the analysis of both operating and stock performance, providing valuable insights for portfolio management strategies.**

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