Miller is out with an excellent post on this topic. He links to some research and graphs which illustrate his point.
Simply, accepted theory is that higher volatility stocks (ie riskier) should perform better than lower volatility ones over time. You know, the old risk-return tradeoff.
The thing is that in practice, they don’t.
There’s been a growing body of research and interest into this phenomenon and I thought it would be worthwhile to make some order out of this.
Read the article here.
4 Responses to The Investor’s Guide to the Low Volatility Anomaly
I think he (and they, although I didn’t read the papers), miss the point. They’re looking at coin flips that go high into the air and comparing them to coin flips that go low in the air, and finding they’re basically 50/50.
What they should be doing is looking at the distribution of volatility, and finding where the high volatility lies and how it’s distributed and sell premium when it’s high and will head back to a more normal range. But hey, it’s not exciting, and there’s nothing to “beat”, so people continue to lose and get fleeced by so called “pros”.
Great comment yogi.
Thanks Wood. Two things that have had the greatest impact on my recent trading: The first was taking the plunge into options, and learning them the “right way” (from the inside out, by playing the house); and the second was my math professor who encouraged me to get a minor in math.
The hardest thing has been to unlearn some bad habits I’ve collected over the years.
I would enjoy reading some posts from you about how you have learned options from the inside out. Maybe just some pointers, starting points, things to focus on, etc. I started with options several years ago and got a decent understanding but didn’t get really deep into them.
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