An Analysis of the Low-Volatility Anomaly on the Johannesburg Stock Exchange

Harrisberg, Richard

An Analysis of the Low-Volatility Anomaly on the Johannesburg Stock Exchange

Master Thesis

2019

Abstract

The low-volatility anomaly can be described as the unexpected outperformance of low-volatility stocks compared to high-volatility stocks over the long-term. This dissertation investigates the low-volatility anomaly and its presence on the Johannesburg Stock Exchange (JSE). Possible reasons behind why low-volatility stocks consistently outperform their high volatility counterparts, as well as their own expected return, over the long-term are discussed. This includes analysing how financial risk is measured and whether this plays a role in obscuring the expected risk-return relationship, in addition to other fundamental factors impacting expected returns. It is found that the low-volatility anomaly is present on the JSE and that using a number of different risk metrics does not significantly change where a stock is ranked on the risk spectrum. Additionally, including an interest rate exposure factor, a value factor and a momentum factor lowers the unexpected portion (Alpha) of the returns of low volatility stocks, at the same time as narrowing the gap between the unexpected performance of the lowest and highest volatility stocks.