Tim Olson
47471b7700
- Flink update_bars debouncing - update_bars subscription idempotency bugfix - Price decimal correction bugfix of previous commit - Add GLM-5.1 model tag alongside renamed GLM-5 - Use short Anthropic model IDs (sonnet/haiku/opus) instead of full version strings - Allow @tags anywhere in message content, not just at start - Return hasOtherContent flag instead of trimmed rest string - Only trigger greeting stream when tag has no other content - Update workspace knowledge base references to platform/workspace and platform/shapes - Hierarchical knowledge base catalog - 151 Trading Strategies knowledge base articles - Shapes knowledge base article - MutateShapes tool instead of workspace patch
2.6 KiB
description, tags
| description | tags | |||
|---|---|---|---|---|
| Buys low-historical-volatility stocks and shorts high-historical-volatility stocks, exploiting the empirical anomaly that lower-risk stocks deliver higher risk-adjusted returns. |
|
Low-Volatility Anomaly
Section: 3.4 | Asset Class: Stocks | Type: Anomaly / Low-Volatility
Overview
The low-volatility anomaly is based on the empirical observation that future returns of previously low-return-volatility portfolios outperform those of previously high-return-volatility portfolios. This contradicts the naive expectation that higher-risk assets should yield proportionately higher returns, and is one of the most robust anomalies in empirical finance.
Construction / Signal
Historical volatility sigma_i is computed from the time series of historical returns (as in the price-momentum formula):
sigma_i^2 = 1/(T-1) * sum_{t=S}^{S+T-1} (R_i(t) - R_i^mean)^2 (270)
Stocks are sorted by sigma_i in ascending order. A dollar-neutral portfolio is constructed by buying stocks in the bottom decile (low volatility) and shorting stocks in the top decile (high volatility).
Entry / Exit Rules
- Entry: Buy bottom-decile stocks by
sigma_i; short top-decile stocks bysigma_i. - Exit: Hold for the defined holding period (similar duration to the lookback window, typically 6–12 months).
- No skip period required: Unlike momentum, no skip period is needed.
Key Parameters
- Lookback window: 6 months (126 trading days) to 1 year (252 trading days)
- Holding period: Similar to the lookback window, typically 6 months to 1 year
- Volatility measure: Historical realized volatility
sigma_i(annualized or monthly) - Portfolio construction: Dollar-neutral (long low-vol, short high-vol)
Variations
- Long-only minimum variance: Buy low-volatility stocks only; used in minimum variance portfolio construction
- Beta-sorted portfolios: Sort by market beta instead of (or in addition to) realized volatility
Notes
- This anomaly goes counter to standard asset pricing theory (CAPM) which predicts higher risk = higher return.
- Potential explanations include leverage constraints, benchmark hugging by institutional investors, and lottery preference among retail investors.
- The lookback and holding periods are similar in duration (no skip period needed, unlike price-momentum).
- Strategy can be combined with value or momentum factors in a multifactor portfolio (see Section 3.6).
- Low-volatility stocks may cluster in defensive sectors (utilities, consumer staples), creating sector concentration risk.