The Low Volatility Anomaly in the U.S and in India – An Evaluation in Light of Different Holding Periods and Regimes

Abstract

This study evaluates the existence and extent of the low volatility anomaly in a developed market, the U.S and in an emerging market, India from 2004-2012 for holding periods of 1, 3 and 4.5 years and for two sub-periods 2004-2007 and 2008-2012, by creating equally weighted decile portfolios. The results show that the low volatility anomaly exists in India but does not exist in the U.S, which is inconsistent with the hypothesis that it exists in both markets. The results obtained are statistically significant at the 5% significance level. The volatility effect is stronger during the volatile period of 2008-2012 in both markets, and when comparing low volatility Decile 1 and high volatility Decile 10 portfolios, the effect gets stronger when holding period is increased from 1 year to 3 years. The implications are that in India, low volatility stocks give higher returns, whereas in the U.S, the use of low volatility stocks to give higher returns may not be useful even during a period in which the market is characterized by uncertainty.