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I've recently stumbled on something that really surprised me. These papers (1, 2) find that past standard deviation of returns is inversely related to future returns. That is, portfolio of low historical variance constituents (stocks) $\to$ better returns.

My question: Are there any studies that contradict these findings for any market(s)? Or is this pretty much the consensus view at the moment? Is this anomaly as well established as the size, momentum, B/M anomalies?

(I'm talking specifically about historical return standard deviation, and not idiosyncratic volatility. I already know that the results for idiosyncratic volatility are ambiguous and there are findings either way.)


1 "Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly", Baker, Bradley & Wurgler, (2011), Financial Analysts Journal.

2 "The Volatility Effect" by Blitz and Vliet, (2007), Journal of Portfolio Management.

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    $\begingroup$ See this question: Why does the minimum variance portfolio provide good returns?. Also, some quants from AQR wrote a paper recently that shows how much of Warren Buffet's performance can be attributed to "betting against beta", ie picking low-beta stocks. $\endgroup$ Oct 29, 2012 at 5:17
  • $\begingroup$ @jase minimum variance between two equities are highly negatively correlated. Hence they offset/compliment each others risk.... $\endgroup$
    – bonCodigo
    Jan 15, 2013 at 19:56
  • $\begingroup$ @bonCodigo I don't understand. $\endgroup$
    – Jase
    Jan 16, 2013 at 0:07
  • $\begingroup$ Do you mean risk-adjusted returns? $\endgroup$
    – Joshua
    Jan 25, 2013 at 4:48

2 Answers 2

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A blog article titled "Low Volatility" tries to replicate the results of the low volalitily anomaly.

This article uses an alternate measure of volatility (beta) and checks for the robustness of the low volatility anomaly. Its universe encompasses small cap, mid cap, large cap. The results are summarized in the table whereby each top 50 stock’s performance are compared with the bottom 50’s performance. Results confirm the anomaly.

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  • $\begingroup$ Could you briefly summarize the paper (objectives, main findings) in a few sentences so I can award the answer? $\endgroup$
    – Jase
    Jan 26, 2013 at 1:53
  • $\begingroup$ The piece simply aims to use an alternate measure of volatility (beta) and check for the robustness of the low volatility anomaly. It universe encompasses small cap, mid cap, large cap. The results are summarized in the table whereby each top 50 stock’s performance are compared with the bottom 50’s performance. Results confirm the anomaly. $\endgroup$ Jan 26, 2013 at 14:38
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Yes, there are contradictions in other markets. Think of U.S. government debt securities.

Building a low volatility portfolio would result in holding T-Bills, earning a meager return and experiencing very little volatility.

Building a high volatility portfolio would result in holding longer duration T-Bonds, and would deliver appreciably higher returns than the T-Bill portfolio over time.

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    $\begingroup$ The papers talk about stocks only. $\endgroup$
    – Jase
    Dec 23, 2012 at 1:54

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