Working Paper: NBER ID: w20591
Authors: Robert Novy-Marx
Abstract: High volatility and high beta stocks tilt strongly to small, unprofitable, and growth firms. These tilts explain the poor absolute performance of the most aggressive stocks. In conjunction with the well documented inability of the Fama and French three-factor model to price small growth stocks, especially unprofitable small growth stocks, these tilts also drive the abnormal performance of defensive equity (i.e., low volatility and/or low beta strategies). While defensive strategy performance is explained by controlling for size, profitability, and relative valuations, the converse is false--the performance of value and profitability strategies cannot by explained using defensive equity performance.
Keywords: Defensive Equity; Low Volatility; High Beta; Market Performance; Profitability; Value
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Defensive equity strategies (G12) | Aggressive stocks (G34) |
| High profitability (G19) | Low volatility (G19) |
| Defensive strategies (L21) | Transaction costs and inefficiencies (D61) |
| Defensive equity performance (G12) | Size, profitability, and relative valuations (L25) |
| Volatility (E32) | Size (L25) |
| Profitability (L21) | Volatility (E32) |
| Defensive strategies (L21) | Small growth stocks (D25) |