The Low Volatility Puzzle: Evidence from Amman Stock Exchange

Hanna Waleed Hanna Alrabadi

Abstract


This study investigates the low volatility puzzle in Amman Stock Exchange (ASE) using daily trading data over the period (2006-2015). Stocks are sorted according to their idiosyncratic volatility, thereafter, high and low volatility portfolios are constructed and basic asset pricing models are estimated. The results of this study confirm the existence of low volatility effect in ASE over the study period. In specific, there is a statistically significant difference in the rate of return between lowest volatility portfolio and highest volatility portfolio. This difference averages 32.5% annually. However, this return is totally explained by the capital asset pricing model (CAPM) and Fama and French (1993) three factor model. Moreover, the findings indicate that the aggregate low-high volatility risk factor is priced in the cross-section of stock returns. The findings of this study are vital to both academicians and practitioners.

Keywords


Low Volatility Puzzle, Anomaly, asset pricing, CAPM, Fama and French, Stock Return, Amman Stock Exchange

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