Country and Sector Drive Low-Volatility Investing in Global Equity Markets

Abstract

Low-risk stocks have historically outperformed high-risk stocks, delivering better long-term returns with less volatility. This counterintuitive effect has persisted since 1926, violating one of the basic tenets of finance theory. We investigate the role of country and sector effects in low-volatility investing in global equities and find that the benefit of the low-volatility anomaly can be earned through country and sector selection in lieu of individual stock selection. We find that low-volatility investing has a pronounced “anti-bubble” behavior that is driven by country and sector positioning. Additionally, we see that employing a country–sector selection approach mitigates many of the implementation pitfalls associated with the minimum-volatility stock selection portfolio. We conclude that country and sector selection is a more practical approach than individual stock selection for capturing the benefits of low-volatility investing in global equities. <b>TOPICS:</b>Security analysis and valuation, analysis of individual factors/risk premia, global