Does Interest Rate Exposure Explain the Low-Volatility Anomaly?

Abstract

We show that part of the outperformance of low volatility stocks can be explained by a premium for interest rate exposure. Low volatility 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. Dependent on the chosen methodology, interest rate exposure explains up to 80% of the unexplained excess return.