Does Interest rate Exposure explain the Low-Volatility Anomaly?

We show that part of the outperformance of low-volatility stocks can be explained by a premium for interest rate exposure. Low-volatility stock portfolios have negative exposure to interest rates, whereas the more volatile stocks have positive exposure. Incorporating an interest rate premium explains part of the anomaly. Depending on assumptions about the interest rate premium, interest rate exposure explains between 20\% and 80\% of the unexplained excess return. We also find that the interest rate risk premium in equity markets exhibits time variation similar to bond markets.