THE LOW-VOLATILITY ANOMALY AND THE ADAPTIVE MULTI-FACTOR MODEL

DOI10.1142/S0219024923500206MaRDI QIDQ6182058zbMATH OpenOpenAlexFDO

Authors Robert A. Jarrow, Martin T. Wells, Liao Zhu

Publication date 23 January 2024

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2003.08302

zbMATH Keywords

AMF modelfalse discovery rateGIBS algorithmhigh-dimensional statisticslow-volatility anomalymachine learning

Mathematics Subject Classification ID

Learning and adaptive systems in artificial intelligence (68T05) Financial markets (91G15)

Abstract: The paper provides a new explanation of the low-volatility anomaly. We use the Adaptive Multi-Factor (AMF) model estimated by the Groupwise Interpretable Basis Selection (GIBS) algorithm to find those basis assets significantly related to low and high volatility portfolios. These two portfolios load on very different factors, indicating that volatility is not an independent risk, but that it's related to existing risk factors. The out-performance of the low-volatility portfolio is due to the (equilibrium) performance of these loaded risk factors. The AMF model outperforms the Fama-French 5-factor model both in-sample and out-of-sample.

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