Inspiring Market Efficiency Results…NOT!
Yes, it is true, lower risk securities have historically outperformed higher risk securities. We’ve seen this in a variety of academic research pieces, but sometimes you gotta grind the data on your own to really understand and get comfortable with the results. A recent paper and this paper and some of our own internal research has suggested that the “low vol” anomaly might be bunk. We are on a data adventure to get to the bottom of this anomaly…
- Col 1 = high idiosyncratic stocks, monthly rebalanced, equal-weight, mid/large cap only, 1927 to 2013
- Col 2 = high beta stocks, monthly rebalanced, equal-weight, mid/large cap only, 1927 to 2013
- Col 3 = low idiosyncratic stocks, monthly rebalanced, equal-weight, mid/large cap only, 1927 to 2013
- Col 4 = low beta stocks, monthly rebalanced, equal-weight, mid/large cap only, 1927 to 2013
The chart below is part of a larger study we’ll be sharing in the near future (click to enlarge):
In the meantime, gleam over the numbers.
There is definitely a counter-intuitive relationship between risk and return. Higher risk, lower return; lower risk, higher return.
The difference between IVOL and BETA are trivial and highly correlated (90%+).
But are these spreads robust? Are they other anomalies in drag? We are going to find out…
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Definitions of common statistics used in our analysis are available here (towards the bottom)