The Value of Low Volatility

Abstract

The evidence for the existence of a distinct low-volatility effect is mounting. However, implicit exposures to the Fama–French value factor (HML) seem to explain the performance of straightforward U.S. low-volatility strategies since 1963. In this article, the author shows that the value effect fails to explain the performance of large-capitalization low-volatility strategies pre-1963 as well as post-1984, when the Fama–French value factor itself ceased to be effective in the large-cap segment of the market. Moreover, the performance of small-capitalization lowvolatility strategies cannot be explained by the value effect during any period. Fama–MacBeth regressions support the existence of a low-volatility effect for every subsample. Based on these results and various other arguments, the author concludes that there is a distinct low-volatility effect that cannot be explained by the value effect. The combined evidence even appears to be stronger for the low-volatility effect than for the value effect.