Interest rate exposure of volatility portfolios

Carmine De Franco, PhD Quantitative analyst [email protected] Bruno Monnier, CFA Quantitative analyst [email protected] Ksenya Rulik, PhD, CFA Head of Quantitative Research [email protected] We assess the exposure of stock portfolios sorted by total volatility to interest rate risk and determine whether this non-equity risk can explain differences in risk and risk-adjusted returns between low and high volatility portfolios over a 20-year period for the US equities. We find that the addition of interest rate risk factor to the 4Factor model reveals small but positive duration for low-volatility portfolios. However this new factor fails to improve the explanatory power of the model for both low and high volatility portfolios, and has no significant impact on the portfolios’ risk-adjusted return. We find that interest rate factor loadings are fairly robust across different specifications of the multi-factor model for lowvolatility portfolios but are unstable for high-volatility portfolios. For all volatility portfolios under study, the significance of the results is highly dependent on the choice of the time period.