Will the low volatility anomaly persist?
Yes. Despite making us question the traditional relationship between risk and reward, low volatility is sensible. By reducing the severity of downside risk, low-volatility strategies have smaller holes to dig themselves out of when the market recovers.
What is a low volatility strategy?
Low-volatility investing is an investment style that buys stocks or securities with low volatility and avoids those with high volatility. Low-volatility investors aim to achieve market-like returns, but with lower risk.
What is the low beta anomaly?
In investing and finance, the low-volatility anomaly is the observation that low-volatility stocks have higher returns than high-volatility stocks in most markets studied. The low-volatility anomaly has also been referred to as the low-beta, minimum-variance, minimum volatility anomaly.
What is considered low volatility?
Volatility is a measure of how much a stock price moves, not just the direction in which it moves. And likewise, it is possible that a ticker that is trading at a volatility of 90 could be considered low, if it has been shown in the past to average 110.
What financial frictions might enable these anomalies to persist?
The following are examples of financial frictions that can enable the persistence of anomalies in part ‘b’ above: transaction costs, taxes and regulations, asset indivisibility, non-traded assets, short selling costs and extensive mispricing in long positions.
Does low volatility mean low risk?
While low volatility traditionally means less risks, less returns, it is not always the case.
Why does low volatility exist?
Why does it exist? There are several reasons why the Low Volatility factor has the potential to outperform the broad market over the long term: The “lottery effect.” Investors can treat stocks like a lottery ticket, seeking larger returns by buying relatively riskier stocks.
