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. We also find that the interest rate risk premium in equity markets exhibits time variation similar to bond markets, but that the level of the interest rate premium, as estimated from the cross-section of stocks, is much higher than the premium observed in the bond market.