A week ago, we posted an article that presented simulation performances of low-volatility strategies. The results illustrated that low-volatility portfolios do have higher returns and lower risks than high-volatility portfolios. The point of this research piece is to identify if the low volatility anomaly is different than the value investing anomaly. To test our hypothesis, we look at the performance of volatility-based strategies within Value and Growth stocks:
- Test the Low-Volatility Factor among Value Stocks;
- Test the Low-Volatility Factor among Growth Stocks;
Our MethodologyWe construct low-vol and high-vol portfolios among Values and Growth stocks. Similar to our previous simulation posts, low-vol portfolios are constructed based on Beta (we also look at IVOL, or idiosyncratic volatility, as a robustness test. The results are very similar). Our value/growth portfolios are constructed based on EBIT/TEV rankings. Here are the 2 value portfolios: To test the Low-Volatility Factor Among Value Stocks:
- high EBIT Low BETA: low vol value stocks
- high EBIT high BETA: high vol value stocks
- low EBIT Low BETA: low vol growth stocks
- low EBIT high BETA: high vol growth stocks
Simulation BackgroundFirst, we break stocks into 5 valuation quintiles from 1963 to 2013 based on EBIT/TEV rankings.
- For example, if there are 10,000 stocks, stocks 1-2000 go in the first quintile (Value); stocks 8,001-10,000 go in the fifth qintile (Growth).
- For example, if we have 2,000 stocks in the top EBIT/TEV quintile, we’d break those 2,000 stocks into 5 buckets of 400 stocks based on BETA rankings.