Dissecting the Low Volatility Anomaly

We find the low volatility anomaly is present in all but the smallest of stocks. Portfolios can be formed on either total or idiosyncratic volatility to take advantage of this anomaly, but we show measures of idiosyncratic volatility are key. Standard risk-adjusted returns suggest that there is no low volatility anomaly from 1996 through 2011, but we find this result arises from model misspecification. Caution must be taken when analyzing high volatility stocks because their returns have a nonlinear relationship with momentum during market bubbles.