The low-volatility effect in African frontier equity markets

Abstract

This study investigated the extent to which the low-risk anomaly is present in a pooled sample of nine African frontier equity markets from March 2004 to July 2023. Portfolio-level analysis was used to investigate the total stock returns of equally weighted quintile portfolios sorted on historical volatility. The presence of a monotonic relationship between historical volatility and subsequent returns was evaluated using monotonicity tests, controlling for possible mediating variables. The results revealed evidence of a statistically significant low-volatility premium, except during bull markets. These findings imply that investors can expect to earn higher returns by allocating to stocks with lower historical volatility, but only during bear markets. These results hold for realistic portfolio construction constraints, such as (il)liquidity and high transaction costs.