Comonotonicity and low volatility effect

  • Wan-Ni Lai
  • Yi-Ting Chen
  • Edward W. SunEmail author
S.I.: Recent Developments in Financial Modeling and Risk Management


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.


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

JEL Classifications

C02 C10 C63 



Chen was supported by the research project funded by InfoTech Frankfurt am Main, Germany under USt-IdNr. DE320245686 and DAAD (Grant No. ST34-AP).


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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.SKEMA Business SchoolUniversité Côte d’AzurNiceFrance
  2. 2.InfoTech FrankfurtFrankfurt am MainGermany
  3. 3.School of Computer ScienceNational Chiao Tung UniversityHsinchuTaiwan
  4. 4.KEDGE Business SchoolTalance CedexFrance

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