Is There A Premium To Trading Low Volume Stocks?
Eric Falkenstein | Mar 21, 2013 02:53AM ET
Value and Size are common strategies based on the higher-than-average return to value and small cap stocks, and one can mention the value or size 'factor' that presumably causes this to happen without much explanation. It's a 'risk' factor to many, because small cap and value stocks generate statitical out-performance, which can only persist if there is risk associated with it. As to what the risk of small cap and value stocks is, no one really knows. At first, it was thought to be financial distress risk, but then we discovered such firms have low returns when you measure distress directly, so that's not it. It's not volatility, or beta.
While I'm skeptical there's a good risk factor story for value and size, there's something intuitively spookier about value and small caps vs. their opposites, so I wouldn't shut the door on that.
In contrast, attempts to explain the low vol premium as a risk factor are like a socialist explaining the open mind until I read it.
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