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Analysing the Exposure of Low-volatility Equity Strategies to Interest Rates

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Abstract

At the dawn of a potential rise in rates triggered by Central Banks in both Europe and the United States, doubts are being raised about the ability of low-volatility portfolios to continue to deliver robust performance. We quantify this latent performance lag and provide empirical explanations, distinguishing parallel moves from non-parallel distortions in the yield curve. More specifically, we evaluate the implications from the low-volatility screening on the portfolio’s industrial breakdown. The conclusion shows that the overweighting of defensive industries is the main source of underperformance in a risk-on environment. However, these bets happen to be the ones that allow the strategy to outperform over a full economic cycle. Therefore, we propose a method to control the low-volatility exposure to changes in interest rates, which should be of interest to benchmarked portfolio managers.

 

 

STAGNOL Lauren , Fixed Income Quantitative Research at Amundi
TAILLARDAT Bruno , Smart Beta & Factor Investing, Amundi

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