The paper explains the low-volatility anomaly from a new perspective . We use the Adaptive Multi-Factor (AMF) model estimated by the Groupwise Interpretable Basis Selection (GIBS) algorithm to find the basis assets significantly related to each of the portfolios. The AMF results show that the two portfolios load on very different factors, which indicates that the volatility is not an independent measure of risk, but are related to the basis assets and risk factorsin the related industries. It is the performance of the loaded factors that results in the low-volatility anomaly. The out-performance of the low-volatility portfolio may not because of its low-risk (which contradicts the risk-premium theory) , but because of the out-performance of the risk factorsthe low-volatility portfolio is loaded on. Also, we compare the AMF model with the traditional Fama-French 5-factor (FF5) model in various aspects, which shows the superior performance of the AMF model over FF5 in many perspectives .
The paper provides a new explanation of the low-volatility anomaly . We use the Adaptive Multi-Factor (AMF) model estimated by the Groupwise Interpretable Basis Selection (GIBS) algorithm to find those basis assets significantly related to low and high volatility portfolios. These two portfolios load on very different factors, indicating that volatility is not an independent risk, but that it's related to existing risk factors. The out-performance of the low-volatility portfolio is due to the (equilibrium) performance of these loaded risk factors. The AMF model outperforms the Fama-French 5-factor model both in-sample and out-of-sample .
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each of the portfolios. The AMF results show that the
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are related to the basis assets and risk factorsin the related industries. It is the performance of the loaded factors that results in the low-volatility anomaly.
that it's related to existing risk factors.
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may not because of its low-risk (which contradicts the risk-premium theory) , but because of the out-performance of the risk factorsthe low-volatility portfolio is loaded on. Also, we compare the AMF model with the traditional
is due to the (equilibrium) performance of these loaded risk factors. The AMF model outperforms the
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(FF5) model in various aspects, which shows the superior performance of the AMF model over FF5 in many perspectives
model both in-sample and out-of-sample