Macro Risk of Low-Volatility Portfolios

Abstract

This paper examines the exposures of low-volatility portfolios to various sources of systematic risk. Our analysis includes interest rate, implied volatility, liquidity, commodity, sentiment, macroeconomic, and climate risk factors. We find that low-volatility portfolios lower the exposure to all significant drivers of systematic risk. The risk reductions vary from a minimum of 20% to over 90% across the various risk factors. Although low-volatility portfolios are very effective at dampening known structural risk factors, the 2020 Covid pandemic episode illustrates that event risk is harder to control for data-driven methods.

Keywords: low-volatility investing, macro risk, Covid pandemic, climate risk, factor investing, quant investing

JEL Classification: G11, G12, G14