Factoring in the Low-Volatility Factor

Pim van Vliet, Amar Soebhag, Guido Baltussen

Research

52 Pages

The authors evaluate why low volatility is missing from common asset pricing models and test it under real world constraints. Accounting for factor asymmetry and trading frictions shows the low volatility long leg adds distinct information and materially improves model performance across samples and specifications.

Key Takeaways

Sharper models: Adding low volatility lifts maximum Sharpe by 13 to 17 percent on net.
Long leg matters: Efficient portfolios assign about 26 to 29 percent weight to the hedged long leg.
Robust across tests: Out of sample exercises include low volatility in 79 percent of winning models.
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