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Abstract

The authors explored whether the well-publicized anomalous returns associated with low-volatility stocks can be attributed to market mispricing or to compensation for higher systematic factor risk. The results of their study, covering a 46-year period, indicate that the relatively high returns of low-volatility portfolios cannot be viewed solely as compensation for systematic factor risk. The results from their cross-sectional analyses indicate that average returns to low-volatility portfolios are determined by common variations associated with the idiosyncratic-volatility characteristic rather than factor loadings. This finding suggests that the excess returns are more likely driven by market mispricing connected with volatility as a stock characteristic.

About the Author(s)

Xi Li

Xi Li is an associate professor of finance at the University of Arkansas, Fayetteville.

Rodney N. Sullivan
Luis Garcia-Feijóo

1 CE

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Additional Information

Published by CFA Institute

12 pages

https://doi.org/10.2469/faj.v72.n1.6

ISSN: 0015-198X

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