Last Updated on 10 February, 2024 by Rejaul Karim
In the labyrinth of financial markets, the enigmatic Low-Volatility Anomaly has long captivated scholars and practitioners alike. Within the confines of 32 pages, Xi Li, Rodney N Sullivan, and Luis García-Feijóo embark on a journey, dissecting whether the alluring returns of low-volatility stocks stem from market mispricing or a premium for bearing higher systematic risk.
Across a comprehensive 46-year study period (1966-2011), their findings, etched in the Financial Analysts Journal, unveil a compelling narrative. Contrary to conventional wisdom, the tantalizing returns of low-volatility portfolios emerge not as compensation for systematic risk but as echoes of market mispricing intricately intertwined with volatility’s nuanced dance.
This paper stands as a beacon, shedding light on the subtle interplay between risk, mispricing, and the anomalies that echo through the corridors of financial theory.
Abstract Of Paper
We explore whether the well publicized anomalous returns associated with low-volatility stocks can be attributed to market mispricing or to compensation for higher systematic risk. Our results, conducted over a 46 year study period (1966-2011), indicate that the high returns related to low-volatility portfolios cannot be viewed as compensation for systematic factor risk. Instead, the excess returns are more likely to be driven by market mispricing connected with volatility as a stock characteristic.
Original paper – Download PDF
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University of Arkansas – Department of Finance
Rodney N Sullivan
University of Virginia, Darden Graduate School of Business
Florida Atlantic University – Department of Finance
In drawing the curtain on the intricate saga of the low-volatility anomaly, the exhaustive inquiry by Xi Li, Rodney N Sullivan, and Luis García-Feijóo delivers a resounding verdict. Spanning a formidable 46-year canvas (1966-2011), the research unravels a compelling narrative.
It asserts that the alluring returns in low-volatility portfolios defy conventional explanations tied to systematic risk compensation. Instead, the findings point decisively toward the stage of market mispricing, where volatility plays a central role as a defining stock characteristic.
As the final chords of this study resound, it leaves us with a profound understanding, challenging preconceptions and casting a revealing light on the intricate dance between market intricacies and risk dynamics in the realm of low-volatility anomalies.
Q1: What is the primary focus of the research conducted by Xi Li, Rodney N Sullivan, and Luis García-Feijóo on the Low-Volatility Anomaly?
A1: The research aims to explore whether the anomalous returns associated with low-volatility stocks can be attributed to market mispricing or compensation for higher systematic risk. The focus is on understanding the underlying factors that contribute to the high returns of low-volatility portfolios.
Q2: What does the study reveal about the relationship between the high returns of low-volatility portfolios and systematic factor risk?
A2: The findings of the study, conducted over a 46-year period (1966-2011), indicate that the high returns related to low-volatility portfolios cannot be viewed as compensation for systematic factor risk. Contrary to conventional wisdom, the excess returns are more likely driven by market mispricing associated with volatility as a stock characteristic.
Q3: How does the research contribute to our understanding of the Low-Volatility Anomaly?
A3: The research challenges conventional explanations by asserting that the tantalizing returns of low-volatility portfolios are not a result of compensation for systematic risk but are linked to market mispricing. By shedding light on the role of volatility as a defining stock characteristic, the study enhances our understanding of the intricate interplay between market intricacies and risk dynamics in the context of low-volatility anomalies.