نوسانات بازده سهام، عملکرد عامل و بازده سهام: شواهد بین المللی عومل محرک از 'نوسانات کم' غیر عادی

This study highlights the link between stock return volatility, operating performance, and stock returns. Prior studies suggest that there is a ‘low volatility’ anomaly, where firms with a low stock return volatility out-perform firms with a high stock return volatility. This paper confirms that low volatility stocks earn higher returns than high volatility stocks in emerging markets and developed markets outside of North America. We also show that low volatility stocks have higher operating returns and this might explain why low volatility stocks earn higher stock returns. These results provide a partial explanation for the ‘low volatility effect’ that is independent from the existence of market anomalies or per se inefficiencies that might otherwise drive a low volatility effect. We emphasize the importance of controlling for stock return volatility when analyzing operating performance and stock performance.

Prior studies have documented that ‘low volatility’ stocks tend to outperform ‘high volatility’ stocks, particularly in the US. Thus, this paper tests two issues: (a) whether the ‘low volatility anomaly’ documented in holds outside of the US, and particularly in emerging markets, and (b) whether a driver of this effect might be the relationship between low volatility returns and operating performance. In so doing, we establish that low volatility indeed leads to stronger operating performance, the low volatility effect exists in both emerging markets and developed markets outside of North America, and strong operating performance might at least partially account for the low volatility effect. These findings are robust to addressing issues of thin trading and transactions costs. Low volatility investing has become an important issue in portfolio management.1Baker et al. (2011) find that, for the US, stocks in the bottom volatility-quintile on average earn higher future returns than do stocks in the other volatility quintiles. Other papers have reported similar results for the US and for developed markets (Ang et al., 2006, Ang et al., 2009 and Blitz and van Vliet, 2007).2Baker et al. (2011) argue that the low volatility effect arises because sophisticated investors must adhere to a benchmark; and thus, are unable to fully exploit an arbitrage opportunity whereby it might be possible to systematically earn higher returns while assuming lower risk. Supporting this theory, Chan et al. (2002) find that mutual funds tend to stick towards a broad market benchmark. Subsequently, anomalies, such as the low volatility anomaly, can persist because institutional investors cannot fully exploit the excess returns they could gain from investing in such stocks. Additionally, the evidence that ‘style drift’ away from such a benchmark tends to harm performance,3 would further discourage funds from actively seeking to exploit such anomalies. The ‘limits to arbitrage’ explanation is a very plausible explanation it need not be the only explanation for the low volatility effect. The ‘limits to arbitrage’ explanation is particularly strong for US markets. This is because the US SEC requires funds to disclose a relevant benchmark (see Form N-1A). This requirement does not exist in all non-US markets. Further, other markets have a higher proportion of retail investors (following Gao and Lin, 2012 and Kuo and Lin, 2012), who would be less constrained to follow a benchmark. While we do believe that benchmarking is important for investors in non-US markets, its effect might be weaker outside of the US. Also, the ‘limits to arbitrage’ explanation may be less dominant in ‘global emerging markets’ portfolios where any benchmarking may actually encourage institutional investors to invest in these low volatility stocks that comprise emerging markets benchmarks.4 It is ex ante unclear whether limits on arbitrage would produce a low volatility effect in emerging markets. This is for several reasons. First, most commonly followed emerging market equity index benchmarks tend to comprise fewer stocks and tend to comprise the most stable stocks. Thus, investors benchmarked to these indices should be more able to arbitrage-away any potential excess profits that could arise from mispricing of low volatility stocks. Thus, we would postulate that the low volatility anomaly, if it exists within emerging markets, may be weaker or may have a different explanation. Second, foreign (i.e. US) investors interested in investing in emerging markets might focus on the ‘cleanest’ exposure to emerging market growth, with the lowest levels of information asymmetry/information opacity.5 These are typically larger stocks that are less volatile. This focus on large stocks means that investors may be more able to arbitrage-away any low volatility anomaly that exists in emerging markets. Thus, if limits on arbitrage are the only explanation for the low volatility effect, it might again be weaker in emerging markets. Further, different markets have different laws and different securities exchange regulations.6 These regulations can influence factors such as stock market liquidity (Cumming et al., 2011c), and the location of trade of cross-listed stock (Halling et al., 2008). This suggests that it is important to verify that the low volatility effect exists in different regulatory environments. This begs the questions: does the low volatility effect still hold in emerging markets or in markets outside the US, and if so, is there an additional explanation for the presence of the low volatility effect? One additional possible explanation for the ‘low volatility effect’ relates to operating performance and investment. Low volatility stocks would likely have strong operating performance as low volatility improves the firm’s access to capital. In an efficient market, there should be an association between stock returns and (positive) earnings surprises, but not merely between stock returns and earnings per se (following Core et al., 2006). However, strong operating performance could increase returns for several reasons that we document in Section 3. These include the fact that strong low volatility facilitates access to capital, which can assist long-dated and entrepreneurial projects. Such projects might have distant cash flows, which the market will rationally discount (Martin, 2012). Subsequently, there will be an increase in stock price over time as information about the success of these projects becomes available. We investigate the two issues: (a) does the low volatility anomaly exist outside of the US, and (b) could it have another explanation, such as higher stock returns reflecting consistently higher operating returns and earnings surprises? Any additional explanation would not be inconsistent with the explanation offered in Baker et al. (2011), instead, there can be multiple consistent and complementary explanations for any low volatility anomaly. The results allow us to make two key findings. First, we find that the low volatility effect does exist in non-US markets and in emerging markets, and that the low volatility effect may partially reflect a firm’s strong operating performance.7 We find that firms in the lowest volatility quintile outperform those in other quintiles both in emerging markets and in developed markets outside of North America. Low volatility stocks also out-perform high volatility stocks in the across the major emerging regions: emerging Asia, Latin America, and EMEA (Europe Middle, East, and Africa). We find evidence largely consistent with a low-volatility effect in non-US/Canadian developed markets. This holds whether we examine value-weighted or equal-weighted portfolios. Second, we show a significant relationship between low volatility and strong operating performance and that this can account for at least part of the low volatility effect. Part of the out-performance of low volatility stocks relates to operating performance. Specifically, the spread between ‘strong’ and ‘weak’ operations companies partially explains the monthly stock return spread between ‘stable’ and ‘volatile’ companies. Further, we find that low volatility firms have significantly higher operating returns in addition to higher stock returns, and that firms with higher operating returns are likely to be in lower volatility quintiles. We also find a statistically significant reduction in the impact of ‘volatility’ on stock returns after controlling for operating performance.8 This implies that there is a relationship between strong operating performance and low volatility. There are several potential explanations for the relationship between operating performance, volatility, and returns. The results could reflect the possibility that low volatility firms are able to outperform market expectations, thereby generating positive unexpected news. Alternatively, the result may arise where the market expects low volatility stocks to outperform, but the uncertainty associated with this out-performance means that the market does not immediately impound its expectations into prices, causing the market to re-evaluate stock prices over time as information becomes more certain. Additionally, in emerging markets, the result is consistent with the theory of return-persistence in Alti et al. (2012). The theory is that if the information environment is poor and investors feel positively about a stock, then investors might interpret subsequent strong operating figures as confirmation of their beliefs. This perceived conformation can cause investors to over-estimate the precision of their information and upwardly value the stock. We ensure that the results are robust to the main criticism of the low volatility effect: its economic tractability in the presence of transactions costs. Li et al. (forthcoming) argue that the low volatility effect is not beneficial after controlling for the presence of low liquidity and high trading costs. Similarly Liang and Wei (2012) show that low liquidity stocks command a risk premium. However, we find that low volatility stocks still earn higher stock returns even after controlling for low liquidity.9 Indeed, we find that low volatility stocks still earn higher returns even after removing the 10% least liquid stocks from the sample.10 We also find some evidence that the low volatility effect is weaker for firms who experience operating performance improvements/surprises, consistent with the idea that the low volatility effect might merely reflect the information associated with positive earnings surprises. The structure of this paper is as follows. Section 2 demonstrates that there is a low volatility effect in both developed and emerging markets. The results show that low volatility companies earn higher returns than do high volatility companies. Section 3 explores a possible driver for the low-volatility effect; strong and stable operating performance. The rationale is that companies with strong operating results might be more stable and predictable; and thus, also have lower volatilities. Section 4 concludes.

This paper provides international evidence that low volatility stocks have higher stock returns, and shows that this may reflect the fact that low volatility firms have higher operating performance. Prior studies show that low volatility stocks in the US have higher stock returns. One explanation is that the low volatility effect arises because benchmarking of institutional money management mandates creates limits to arbitrage. This explanation would be valid to varying degrees in different geographies, and particularly so in emerging markets, where there is both a less institutionalized fund management industry but where low volatility stocks are more likely to feature in any index benchmark. We propose that operating performance can be an additional explanation for the low volatility effect. Low volatility firms tend to have strong operating returns. Strong operating returns would increase expected stock returns. If the strong operating performance is unexpected, then it would drive investors to bid up the stock price. Otherwise, the operating performance would yield higher cash flows, which the firm could use to aggressively pursue expansion opportunities. This would especially hold in emerging markets, where there are fewer constraints on managerial activities. These investments would increase corporate risk and drive up expected returns. We find evidence for our hypothesis in an international sample. We expand upon the findings in Baker et al. (2011) by examining international stock returns and by providing an additional explanation for the low volatility effect. We show that the low volatility effect exists across most markets outside the US, including in emerging markets. We also show that (a) part of the stable-less-volatility stock return spread is attributable to operating performance, (b) low-volatility stocks have stronger future operating performance, and (c) strong past operating performance can help predict whether a firm will be a low volatility stock in the future, an (d) that controlling for operating performance significantly influences the relationship between stock returns and volatility. This implies that higher operating performance is an additional possible explanation for the low volatility effect. This can operate along-side the benchmarking explanation proposed in Baker et al. (2011).