Is Risk Always Rewarded? Low-Volatility Anomalies

Abstract

While the relationship between risk and return in the stock market is ambiguous, Zaremba and Shemer give a broad review of its theoretical background and empirical evidence. The low-risk anomaly implies that standard deviation, beta (systematic risk), and idiosyncratic volatility are usually negatively correlated with future returns. This phenomenon is usually explained away with preference for lotteries, representativeness, overconfidence, greed and envy, attention grabbing, leverage constrains, short-sale constraints, or regulatory constraints. On a positive note, extreme risk indicators such as value at risk or skewness are frequently positive predictors of future returns.