The Low-Volatility Anomaly: Market Evidence on Systemic Risk vs. Mispricing

January 29, 2016
  • Contributors:

    Xi Li, Rodney N. Sullivan, Luis Garcia-Feijóo
  • Topic:

    Style Investing

Financial Analysts Journal

Researchers have demonstrated a long-term connection between future stock returns and various measures of prior stock price variability, including total return volatility, idiosyncratic volatility and beta. Specifically, in U.S. and international markets, future returns of previously low-return-variability portfolios significantly outperform those of previously high-return-variability portfolios.

These empirical findings are particularly intriguing because, of course, economic theory dictates that higher expected risk is compensated with higher expected return. As such, these findings highlight the need to gain a better understanding of the underpinnings of this curious anomaly.

We explore whether this anomaly associated with low-volatility stocks can be attributed to market mispricing or to compensation for higher systematic risk. Data from a 46-year study period (1966–2011), indicate that the high returns related to low-volatility portfolios cannot be viewed as compensation for systematic factor risk. Instead, they are more likely driven by market mispricing connected with volatility as a stock characteristic.



  • The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees.
  • The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Neither the author nor AQR undertakes to advise you of any changes in the views expressed herein.
  • This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein.
  • Past performance is no guarantee of future results.
  • Certain publications may have been written prior to the author being an employee of AQR.
  • Information contained on third party websites that AQR Capital Management, LLC, (“AQR”) may link to are not reviewed in their entirety for accuracy and AQR assumes no liability for the information contained on these websites.