Further evidence in support of a low-volatility anomaly: Optimizing buy-and-hold portfolios by minimizing historical aggregate volatility

Phil Maguire (), Stephen Kelly, Robert Miller, Philippe Moser, Philip Hyland and Rebecca Maguire
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Phil Maguire: National University of Ireland
Stephen Kelly: National University of Ireland
Robert Miller: National University of Ireland
Philippe Moser: National University of Ireland
Philip Hyland: National College of Ireland, IFSC
Rebecca Maguire: National College of Ireland, IFSC

Journal of Asset Management, 2017, vol. 18, issue 4, No 6, 326-339

Abstract: Abstract The ‘low-volatility anomaly’ is the counter-intuitive observation that portfolios of low-volatility stocks tend to yield higher risk-adjusted returns than portfolios of high-volatility stocks. In this article, we investigate if the anomaly holds, not only for portfolios consisting of individual low-volatility stocks, but for portfolios that have been optimized to minimize aggregate volatility. We exploit patterns in historical price fluctuations to identify optimized portfolios whose aggregate volatility is expected to remain low. These portfolios are evaluated by comparing them against the performance of market capitalization and low-volatility quintile benchmarks out-of-sample. The results reveal that, as well as outperforming the market, both in terms of returns and risk, optimized low-volatility strategies also outperform the S&P Low-Volatility Index. These findings provide further support for a low-volatility effect, and imply that the root of the anomaly may lie with a failure to exploit diversification opportunities.

Keywords: low-volatility anomaly; portfolio optimization; buy-and-hold portfolio; variance minimization; diversification; out-of-sample testing (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1057/s41260-016-0036-1

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