Comonotonicity and low volatility effect

Wan-Ni Lai, Yi-Ting Chen, Edward W. Sun*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Scopus citations


Discussions on low volatility effects often highlight the advantage of low volatility stocks outperforming high volatility stocks. Using comonotonicity tests, our study provides evidence of the downside of this effect: stock returns do not increase monotonically with low volatility, but volatility increases monotonically with specific risks. We find that, counterintuitively, the low volatility effect is mostly driven by high volatility stocks with high specific risks. Our empirical analysis addresses a cross section of stock returns across 23 developed countries and employs comonotonicity tests to show that expected stock returns do not increase monotonically with lower volatility. In addition, by decomposing volatility into its individual risk components, we show that volatility increases monotonically with its specific risk component. Finally, we also confirm that returns obtained from the low volatility effect in stocks are principally driven by the specific risk component rather than the systematic risk component.

Original languageEnglish
Pages (from-to)1057-1099
Number of pages43
JournalAnnals of Operations Research
Issue number1-2
StatePublished - Apr 2021


  • Asymmetric risk-return
  • Comonotonicity
  • Multi-factor model
  • Low volatility effect
  • Portfolio
  • Risk decomposition


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