Why does low volatility anomaly exist?
The low volatility anomaly refers to the finding that stocks exhibiting lower volatility achieve higher returns than can be explained by the efficient market theory (Capital Asset Pricing Model). They reason that higher risk, in this case higher volatility, will always entail higher returns.
What does it mean when a company has low volatility?
A lower volatility means that a security’s value does not fluctuate dramatically, and tends to be more steady.
Does interest rate exposure explain the low volatility anomaly?
Low-volatility stock portfolios have negative exposure to interest rates, whereas the more volatile stocks have positive exposure. Incorporating an interest rate premium explains part of the anomaly. We also find that the interest rate risk premium in equity markets exhibits time variation similar to bond markets.
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. This investment style exploits the low-volatility anomaly. Low-volatility investors aim to achieve market-like returns, but with lower risk.
Why is volatility important?
The higher the volatility, the higher the option price. High volatility, or risk, increases the likelihood that the option’s price movement will be significant during the time it has left until expiration, whether it is a put or a call option.
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.
Is low volatility good?
Simply put, volatility is the range of price change security experiences over a given period of time. If the price stays relatively stable, the security has low volatility. A highly volatile security hits new highs and lows quickly, moves erratically, and has rapid increases and dramatic falls.