The Volatility Effect Across Size Buckets : Evidence From the Indian Stock Market

The portfolio of low-volatility stocks earns high risk-adjusted returns over a full market cycle. The annual alpha spread of low versus high-volatility quintile portfolios is 25.53% in the Indian equity market for the period from January 2000 to September 2018. The low-volatility (LV) effect is not an overlap of other established factors such as size, value or momentum. The effect persists across various size buckets (market capitalization). The performance of the low-volatility effect within various size buckets is analyzed using three different portfolio formation methods. Irrespective of the method of portfolio construction, the low-volatility effect exists and it also generates economically and statistically significant risk-adjusted returns. The long-short portfolios across the study deliver exceptionally high and statistically significant returns accompanied by negative beta. The low-volatility effect is not restricted to small or illiquid stocks. The effect delivers the highest risk-adjusted returns for the portfolio consisting of largecap stocks. Though the returns of the portfolio comprising of large-cap LV stocks are lower than the returns of the portfolio comprising of small-cap LV stocks, its Sharpe ratio is higher because of less risky nature of large-cap stocks as compared to small-cap stocks. The LV portfolio majorly comprises of large-cap, growth and winner stocks. But within size buckets, large-cap and mid-cap low LV picks growth and winner stocks, while small-cap LV picks value stocks