12 - The Low Volatility Anomaly and the Preference for Gambling

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Abstract

Previous literature has established that low volatility stocks outperform high volatility stocks on a risk-adjusted basis. In this Chapter, we show that this low volatility anomaly is linked to the preference for lottery stocks, which have experienced a high daily return in the previous month. Not all high volatility stocks underperform. The underperformance of high volatility stocks arises largely from the underperformance of high volatility lottery stocks. High volatility lottery stocks underperform high volatility stocks in 31 out of 32 countries.

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