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Resilience of Low-volatility Stocks

September 23, 2022 • Posted in Strategic Allocation, Volatility Effects

The body of research indicates that low-volatility/low-beta stock investing suppresses exposure to overall equity market risk. Does it work equally well for different sources of such risk? In his September 2022 paper entitled “Macro Risk of Low-Volatility Portfolios”, David Blitz examines the separate exposures of low-volatility portfolios to interest rate, implied volatility, liquidity, commodity, sentiment, macroeconomic and climate (CO2 emissions) risk factors. Specifically, he compares the contemporaneous interactions with these risks of the MSCI USA Minimum Volatility Index (based on minimum variance optimization), the S&P 500 Low Volatility Index (the 100 inverse volatility-weighted stocks in the S&P 500 with the lowest volatilities over the past one year) and the S&P 500 Index as the market benchmark. He measures risk factor-index interactions via univariate regressions of monthly excess returns versus monthly risk factor values. He also considers risk factor interactions with ten (decile) equally weighted portfolios of the 1,000 largest U.S. stocks at each point in time sorted by preceding 36-month volatilities. Using monthly total returns for the indexes/portfolios in U.S. dollars in excess of the risk-free rate and monthly risk factor values during January 1991 through December 2021, he finds that:


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