The low volatility effect in the Norwegian stock market

Abstract

In this paper we seek to investigate whether the low volatility puzzle is present in Norwegian stock market during the period January 1980 - December 2019. By examining the relationship of total volatility and returns and idiosyncratic volatility and returns, we conclude that low volatility securities do not outperform high volatility securities. Contrary, we find that investors generally are being compensated for holding more volatile (risker) securities in line with traditional finance theory. We arrive at this conclusion by sorting available securities into portfolios based on either total volatility or idiosyncratic volatility using a rolling window approach. The return performances of these portfolios are then analyzed. We explore different variations of rolling windows and holding periods, as well as different filtration techniques. Furthermore, the portfolios’ performances are analyzed and controlled for different factors such as High-minus-Low (HML), Small-minus-Big (SMB), Up-minus-Down (UMD) and Liquidity (LQD). Lastly, we explore the industry exposure in the different portfolios and the effect this has on the respective portfolios.