Does interest rate exposure explain the low-volatility anomaly?

Joost Driessen, Ivo Kuiper, Kamil Korhan Nazliben, Robert Beilo

Research output: Contribution to journalArticleScientificpeer-review

Abstract

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.
Original languageEnglish
Pages (from-to)51-61
JournalJournal of Banking and Finance
Volume103
DOIs
Publication statusPublished - Jun 2019

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Anomaly
Interest rates
Premium
Bond market
Stock volatility
Time variation
Interest rate risk
Cross section
Risk premium
Equity markets

Cite this

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title = "Does interest rate exposure explain the low-volatility anomaly?",
abstract = "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.",
author = "Joost Driessen and Ivo Kuiper and Nazliben, {Kamil Korhan} and Robert Beilo",
year = "2019",
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language = "English",
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pages = "51--61",
journal = "Journal of Banking and Finance",
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Does interest rate exposure explain the low-volatility anomaly? / Driessen, Joost; Kuiper, Ivo; Nazliben, Kamil Korhan; Beilo, Robert.

In: Journal of Banking and Finance, Vol. 103, 06.2019, p. 51-61.

Research output: Contribution to journalArticleScientificpeer-review

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AU - Nazliben, Kamil Korhan

AU - Beilo, Robert

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Y1 - 2019/6

N2 - 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.

AB - 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.

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DO - 10.1016/j.jbankfin.2019.03.013

M3 - Article

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JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

SN - 0378-4266

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