In Search of the Low Volatility Anomaly: A Case Study
Authors: Fei Mei Chan, Director, Index Investment Strategy, S&P Dow Jones Indices; Craig J. Lazzara, CFA, Managing Director, Global Head of Index Investment Strategy, S&P Dow Jones Indices
Classical economic theory tells us that risk and return are directly related—in general, in order to earn above-average returns an investor must be prepared to bear above-average risks. But empirically, this relationship doesn’t hold up. In fact, ample research points to the existence of a low volatility factor. Because this seems to fly in the face of what we think we know about risk and return, the low volatility factor is often referred to as the low volatility anomaly.
In this paper, we focus on whether or not the low volatility anomaly persists today. More broadly, we offer a simple toolkit that can be used to assess the persistence of any factor-based effect.
Read on to find out what this toolkit can tell us about the origins of the S&P 500 Low Volatility Index’s recent performance challenges—and whether they signify the extinction of an anomaly.