Why Low-Volatility Isn’t Working: “Brexit Broke It"

The market environment since the Brexit “V” bounce has been odd, with correlation breakdowns occurring amid an incredibly tight S&P trading range most of the summer. Market volatility, as measured by the CBOE VIX index, is near lows – odd, particularly given the numerous identifiable market risks known to participants.

In this environment the Nomura Quantitative Investment Strategy team wants to understand why low volatility stock selection has worked so poorly during a market environment of  low volatility. They consider the popular notion -- crowding in to low volatility stocks has led to over valuation. But in the end they point to a correlation analysis between two polar opposite stock categories, both of which are based on risk...