NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Understanding Defensive Equity

Robert Novy-Marx

NBER Working Paper No. 20591
Issued in October 2014
NBER Program(s):Asset Pricing

High volatility and high beta stocks tilt strongly to small, unprofitable, and growth firms. These tilts explain the poor absolute performance of the most aggressive stocks. In conjunction with the well documented inability of the Fama and French three-factor model to price small growth stocks, especially unprofitable small growth stocks, these tilts also drive the abnormal performance of defensive equity (i.e., low volatility and/or low beta strategies). While defensive strategy performance is explained by controlling for size, profitability, and relative valuations, the converse is false--the performance of value and profitability strategies cannot by explained using defensive equity performance.

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Document Object Identifier (DOI): 10.3386/w20591

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