Low-Volatility Puzzle: Evidence from Amman Stock Exchange

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. Specifically, there are statistically significant differences in the rate of return between lowest-volatility portfolios and highest- volatility portfolios. The annual average of these differences amounts to 32.5%. 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 academics and practitioners.