Template-Type: ReDIF-Paper 1.0
Author-Name: Blitz, D.C.
Author-Name-Last: Blitz
Author-Name-First: David
Author-Name: van Vliet, P.
Author-Name-Last: van Vliet
Author-Name-First: Pim
Author-Person: pvl6
Title: The Volatility Effect: Lower Risk without Lower Return
Abstract: We present empirical evidence that stocks with low volatility earn high risk-adjusted returns. The annual alpha spread of global low versus high volatility decile portfolios amounts to 12% over the 1986-2006 period. We also observe this volatility effect within the US, European and Japanese markets in isolation. Furthermore, we find that the volatility effect cannot be explained by other well-known effects such as value and size. Our results indicate that equity investors overpay for risky stocks. Possible explanations for this phenomenon include (i) leverage restrictions, (ii) inefficient two-step investment processes, and (iii) behavioral biases of private investors. In order to exploit the volatility effect in practice we argue that investors should include low risk stocks as a separate asset class in the strategic asset allocation phase of their investment process.
Creation-Date: 2007-07-04
File-URL: https://repub.eur.nl/pub/10460/ERS-2007-044-F&A.pdf
File-Format: application/pdf
Series: RePEc:ems:eureri
Number: ERS-2007-044-F&A
Classification-JEL: G3, H54, M
Keywords: CAPM, Fama-French factors, alpha, international, low risk stocks, strategic asset allocation, volatility, volatility effect
Handle: RePEc:ems:eureri:10460