The Low-Volatility Anomaly Revisited

Abstract

Abstract The present study conducts two different strategies in order to exploit the low-volatility anomaly in the U.S., the European and the German equity market. The first strategy uses quadratic optimization to calculate optimal portfolio weights. The second strategy sorts stocks into portfolio quintiles based on past realized volatility. Our main findings show that both low-volatility strategies outperform the respective benchmark market portfolio. While the effect is strongest during bull-market periods, it gets weaker during periods of market downturns. Additional results show that in the U.S. market, the low-volatility anomaly can be explained by trading volume and operating profitability. In the German market, operating profitability and the dividend yield can explain the low-volatility effect while in the European market none of these characteristics play a role in explaining the effect. Overall, our findings provide evidence that the low-volatility anomaly still is a robust phenomenon that is inherent in mature capital markets. JEL Classification: G1