Swing Trading Signals


Since 2013

  • 100% Quantified, data-driven and Backtested
  • We always show our results!
  • Signals every day via our site or email
  • Cancel at any time!

The Profitability of Low Volatility

Last Updated on 10 February, 2024 by Rejaul Karim

Embarking on the puzzle of low-risk stock performance, David Blitz and Milan Vidojevic dissect “The Profitability of Low Volatility.”

Amid the financial complexity, they challenge the premature link to the Fama-French five-factor model, emphasizing a lingering mystery about risk and return.

Market beta’s exposure fails to secure a premium, contrasting with the potency of volatility mispricing. In a financial symphony, the low-volatility anomaly asserts its uniqueness, evading the clutches of established models.

Abstract Of Paper

Low-risk stocks exhibit higher returns than predicted by established asset pricing models, but this anomaly seems to be explained by the new Fama-French five-factor model, which includes a profitability factor. We argue that this conclusion is premature given the lack of empirical evidence for a positive relation between risk and return. We find that exposure to market beta in the cross-section is not rewarded with a positive premium, regardless of whether we control for the new factors in the five-factor model. We also observe stronger mispricing for volatility than for beta, which suggests that the low-volatility anomaly is the dominant phenomenon. We conclude that the low-risk anomaly is not explained by the five-factor model.

Original paper – Download PDF

Here you can download the PDF and original paper of The Profitability of Low Volatility.

(An option to download will come shortly)

Author

David Blitz
Robeco Quantitative Investments

Milan Vidojevic
Robeco Quantitative Investments

Conclusion

In conclusion, the profitability of low-volatility stocks persists as a robust anomaly, challenging conventional asset pricing models. While the Fama-French five-factor model introduces a profitability factor that seemingly explains the phenomenon, our analysis suggests a premature conclusion.

Our investigation reveals a lack of empirical support for a positive risk-return relationship, challenging the notion that exposure to market beta in the cross-section merits a premium. Notably, mispricing is more pronounced for volatility than for beta, underscoring the dominance of the low-volatility anomaly.

Thus, the evidence remains compelling that the profitability of low-volatility stocks stands independent of the current five-factor model, emphasizing the need for continued exploration and understanding of this persistent market anomaly.

Related Reading:

Are Hedge Funds on the Other Side of the Low-Volatility Trade?

Low Risk Anomaly Everywhere – Evidence from Equity Sectors

FAQ

1. What is the primary challenge posed by David Blitz and Milan Vidojevic to the explanation of the profitability of low-volatility stocks provided by the Fama-French five-factor model?

The primary challenge posed by David Blitz and Milan Vidojevic is that the conclusion attributing the profitability of low-volatility stocks to the new Fama-French five-factor model, specifically the inclusion of a profitability factor, is premature. They argue that there is a lack of empirical evidence supporting a positive relationship between risk and return, questioning the validity of the profitability factor in explaining the phenomenon.

2. According to the paper, what is the observation regarding the exposure to market beta in the cross-section and its relation to a positive premium, and how does this contribute to the understanding of the low-risk anomaly?

The paper finds that exposure to market beta in the cross-section is not rewarded with a positive premium, irrespective of whether the new factors in the five-factor model are controlled for. This observation challenges the traditional notion that higher exposure to market beta should correspond to a positive premium. The lack of a positive premium for market beta exposure adds to the complexity of understanding the low-risk anomaly, suggesting that other factors, particularly related to volatility mispricing, play a more dominant role in driving the anomaly.

3. What does the paper conclude about the dominance of the low-volatility anomaly and its independence from the Fama-French five-factor model?

The paper concludes that the low-volatility anomaly remains a robust and independent phenomenon, not entirely explained by the Fama-French five-factor model. Despite the inclusion of a profitability factor in the model, the evidence suggests that the profitability of low-volatility stocks stands apart. The analysis reveals that mispricing is more pronounced for volatility than for beta, emphasizing the dominance of the low-volatility anomaly and underscoring the need for further exploration and understanding of this persistent market anomaly.

Find A Comprehensive Database of Research Papers On Trading Strategies here

Leave a Reply

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

Monthly Trading Strategy Club

$42 Per Strategy

>

Login to Your Account



Signup Here
Lost Password