S&P Dow Jones Indices’ researchers take a closer look at the long-term effectiveness of low volatility strategies in this paper.
Aye Soe, S&P’s director of index research and design, analyses the low-volatility effect in the US equity market, with a focus on the common properties of various low-volatility strategies.
Drawing from the extensive academic literature that exists on the topic, researchers examine the two major approaches to constructing low-volatility portfolios and apply them to the US equity market: mean variance optimization-based versus the rankings-based approaches.
The analysis shows that both approaches are equally effective in reducing portfolio volatility over a long-term investment horizon.
The analysis is then extended to international and emerging markets.
The findings confirm that the low-volatility effect is not unique to US equity markets but is present on a global scale.