Why low-volatility investing works in Nordic markets – does size matter?

Abstract

Stocks with past low idiosyncratic volatility deliver high future returns and significantly outperform stocks with high idiosyncratic volatility in the Nordic stock market over a sample period from January 2001 to December 2017. For the Nordic market, I show that the low-volatility anomaly exists with cross-sectional Fama Macbeth coefficient -1.26 and robust t-statistics -4.92. The effect is observed with equal-weighted returns in the aggregated Nordic market but also individually in Finland, Denmark, and Sweden. With value-weighted returns, the effect is significant and robust in all Nordic markets, including Norway. Size and quality, or other conventional controls, fail to explain IVOL thoroughly. Aggregated Nordic long-short IVOL portfolios among medium-sized stocks deliver a large, significant monthly FF-3 alpha of 1.6% with a 1.5% excess return. IVOL is the strongest amongst underpriced big and medium-sized stocks as well as portfolios with junk or neutral stocks. For the United States, IVOL remains controversially insignificant over the sample period from 2001 to 2017. As a reference, and consistent with past literature, an earlier sample period of 1980-2003 is also examined herein with significant coefficients for the United States.