RT Journal Article
SR Electronic
T1 Low Volatility Needs Little Trading
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 33
OP 42
DO 10.3905/jpm.2018.44.3.033
VO 44
IS 3
A1 Pim van Vliet
YR 2018
UL https://pm-research.com/content/44/3/33.abstract
AB The author shows that an efficient low-volatility strategy only needs a little amount of trading. The empirical literature on low-volatility investing reveals a concave relation between the amount of trading and the risk reduction. Portfolio simulations confirm this non-linear pattern in which each increase in turnover results in smaller marginal reductions in volatility. In general a moderate trading level of 30% is enough to reduce portfolio volatility by 25% compared with the market index. In addition, low-volatility stocks are relatively liquid and cheap to trade, primarily because they are much larger than the average stock. The law of diminishing returns also applies to other alpha factors such as value and momentum and integrating them into a multi-factor low-volatility strategy is an efficient way to increase factor exposure at low trading costs.TOPIC: Analysis of individual factors/risk premia