Price Perspective - In Depth

U.S. Equities

Volatility Episodes Demonstrate Benefits of Factor Diversification

Farris G. Shuggi, CFA, Portfolio Manager
Som Priestley, CFA, Multi-Asset Solutions Strategist
Christina Moore, CFA, Multi-Asset Solutions Associate Strategist

Executive Summary

  • We studied the performance of various equity return factors prior to, during, and following a rise in the Chicago Board Options Exchange’s Volatility Index (VIX) equal to at least one standard deviation from the index’s long-term mean. We also analyzed high-volatility periods to see if there were any changes in their average characteristics over the course of the study, which ran from January 1, 1990, through March 31, 2018.
  • Our analysis found that relative factor performance varied greatly in and around periods of high volatility. On average, equity markets rebounded sharply once volatility subsided. We also found that periods of high volatility shortened significantly following the 2008–2009 global financial crisis.
  • We believe our findings support the case for maintaining a diversified factor profile in equity portfolios and for taking a patient approach to the volatility cycle.

Equity market volatility came roaring back in February 2018, shaking many investors who had grown accustomed to the relatively benign volatility environment that persisted throughout most of 2017. This sudden, albeit relatively brief, spike in volatility prompted us to look at past cycles in which the VIX rose at least one standard deviation above its long-term mean.

Our inquiry had several objectives:

  • We wanted to analyze historical long/short returns for different equity return factors―such as size, value, and momentum—to identify performance patterns before, during, and after periods of high volatility.
  • We hoped to identify any changes over time in the characteristics of high-volatility periods.
  • We sought to determine what, if anything, investors could do to prepare for future volatility.

Our analysis identified a number of trends in relative factor performance before, during, and after high-volatility periods. However, we also found that periods of high volatility shortened significantly in the wake of the 2008–2009 global financial crisis (GFC), increasing the speed with which shifts in relative factor performance occurred.1

We believe our findings confirm the importance of maintaining adequate portfolio diversification, including factor diversification, even in the face of extended equity style cycles.


We examined every case between January 1, 1990, and March 31, 2018, in which the VIX rose at least one standard deviation (equaling 27.2 points) above its long-term historical mean of 19.4. Our analysis tracked the relative returns on three commonly observed equity return factors (size, value, and momentum), as well as the performance of the broad equity market and of a hypothetical equal-weighted factor portfolio. The latter was included to test whether an investor with diversified factor exposures potentially could have achieved a smoother performance profile across the volatility cycles studied.2

Performance was measured over the following periods:

  • Periods of high volatility, defined as episodes in which the VIX rose to at least one standard deviation above its long-term mean. Only periods lasting at least 10 trading days were included in our study.3
  • The 60 days prior to periods of high volatility.
  • The 60 days following periods of high volatility.


Our key observations are that returns for the size factor and for the broad market both were fairly flat going into periods of high volatility, while the value factor (as measured by the book/price ratio) and high-momentum stocks outperformed (Figure 1). The equal-weighted factor portfolio performed relatively well, with a mean return of approximately 4%, benefiting from its exposure to high-momentum stocks.

If periods leading up to high-volatility events are considered the “normal” market environment, these results are as one would expect―the traditional risk premia yielded positive returns. 

FIGURE 1: Average Performance Prior to High-Volatility Periods
January 1, 1990, Through March 31, 2018 

Sources: Kenneth R. French Data Library and CBOE/Haver Analytics; data analysis by T. Rowe Price. 


There was a sharp reversal in factor performance once the VIX breached the plus one standard deviation level (Figure 2). Momentum, the best performer going into high-volatility periods, saw its fortunes reversed, reflecting the tendency of many investors to sell their winners first.

Value stocks, meanwhile, suffered relative to more expensive securities, as value stocks are often considered to present higher risks. Similarly, large-cap stocks, often perceived by investors to be less risky, outperformed small-cap stocks by almost 4%, on average.

Finally, while the broad market sold off by an average of 5.2% during the high-volatility periods, the equal-weighted factor portfolio was down only slightly, on average. 

FIGURE 2: Average Performance During High-Volatility Periods
January 1, 1990, Through March 31, 2018 

Sources: Kenneth R. French Data Library and CBOE/Haver Analytics; data analysis by T. Rowe Price. 


As one would expect, the post high-volatility periods in our study were characterized by a return to risk-on investor behavior (see Figure 3). The broad market rebound strongly―up 7.2%, on average―suggesting that patient investors who maintained their equity market positions through the periods of high volatility were rewarded for their patience. Small-cap stocks outperformed large-cap stocks by approximately 3%, while value and high-momentum stocks also rebounded. The equal-weighted factor portfolio provided a positive return in post high-volatility periods, benefiting from its diversified factor exposure. 

FIGURE 3: Average Performance in Post High-Volatility Periods
January 1, 1990, Through March 31, 2018 

Sources: Kenneth R. French Data Library and CBOE/Haver Analytics; data analysis by T. Rowe Price. 

FIGURE 4: Summary Statistics for High-Volatility Periods
January 1, 1990, Through March 31, 2018

Source: CBOE/Haver Analytics; data analysis by T. Rowe Price. 


Before we interpret the observed differences in relative factor performance in and around periods of high volatility, we need to examine the characteristics of the high-volatility periods themselves to see if there have been trends—such as changes in their duration and intensity—that may have implications for investors and their portfolio strategies.

As previously mentioned, we looked at every period of high volatility (as measured by the VIX) from January 1, 1990, through March 31, 2018, in order to identify trends in the historical data. Figure 4 summarizes average characteristics for all the high-volatility periods in our sample and provides separate breakouts for periods before and after the GFC.

While most metrics were fairly consistent across pre- and post-GFC periods, the mean length of high-volatility periods was not:

  • For the full sample, the mean high-volatility period was slightly more than 26 days.
  • Prior to the start of the GFC, the mean high-volatility period lasted a bit more than 27 days.
  • Following the end of the GFC, the mean length of high-volatility periods fell sharply, to just under 12 days.

Figure 5 provides a more detailed look at every high-volatility period during the time frame covered by our study. We see that only two of the periods following the GFC lasted longer than 11 days.4 The more typical pattern in the post-GFC era has been a greater frequency of one- or two-way jumps in volatility that quickly revert.

FIGURE 5: Length of High-Volatility Periods Before and After the Global Financial Crisis
January 1, 1990, Through March 31, 2018 

Source: CBOE/Haver Analytics; data analysis by T. Rowe Price. 


As stated above, our objectives for this study were to examine the historical performances of key equity return factors in and around periods of high volatility and to measure the characteristics of the high-volatility periods themselves to see what implications they might have for portfolio management. Our key findings:

  • Relative factor performance varied greatly prior to, during, and following periods of high equity market volatility.
  • On average, the broad equity market rebounded sharply coming out of periods of high volatility.
  • The mean length of high-volatility periods fell significantly following the end of the GFC.

To us, these findings speak to the importance of diversification and discipline. While variations in factor performance may tempt investors to try to time relative return trends, shorter periods of high volatility potentially could increase
the risk of mistiming factor allocations.

Moreover, our analysis found that an equal-weighted factor portfolio experienced relatively consistent returns, on average, across the high-volatility periods included in our study. We believe investors would be well advised to reassess their equity portfolios regularly to ensure that any factor exposures are desired and (in our opinion) balanced relative to their risk profile.

The discipline to stick with a long-term investment strategy is also important. While the periods of high volatility we studied involved substantial equity sell-offs, the rebounds in performance following those episodes more than made up for losses suffered during them, on average.

These observations may be especially important as the post-GFC equity bull market extends into its 10th year. Long periods of strong equity performance can lead to complacency, but there also may be a temptation for investors to take risk off the table quickly when volatility returns to the market. We believe prudently diversified investors can take comfort in the fact that equities historically have rewarded those who have stayed with them for the long term. 

Past performance is not a reliable indicator of future returns.

1 We use a date range of September 15, 2008, through July 13, 2009, to define the GFC. During this period, the IX breached and remained more than one standard deviation above its long-term mean.

2 The broad market returns and factor returns used in our analysis were drawn from the French Data Library, a research site maintained by Kenneth R. French, a finance professor at Dartmouth University and a noted academic researcher. Broad market returns were based on daily returns for a capitalization-weighted universe consisting of the U.S. common stocks listed on the New York Stock Exchange, the American Stock Exchange, and the Nasdaq market for which reliable price and return data are available. Factor returns were based on portfolios created from the stocks in the broad market universe ranked by the following factors: for size, market capitalization; for value, book value/market capitalization (i.e., book/price); for momentum, price improvements over the previous 2 to 12 months. Relative returns were based on the highest and lowest deciles in each factor ranking: for size, the return for the smallest decile minus the return for the largest decile; for value and momentum, the highest decile minus the lowest decile. Each factor return was given a 1/3 weight in the returns for the equal-weighted portfolio. For more details on the return methodology, please see the French Data Library, on the Web at

3 In some cases, we allowed for short-term dips in the VIX below the mean plus 1 standard deviation threshold in order to avoid breaking one high-volatility period into two shorter ones separated by several lower-volatility days. See the appendix on pages 4 and 5 for a full list of the high-volatility periods and those included in our study. 

4 These periods occurred in the summers of 2010 and 2011. See the appendix for the full details of all historical periods covered by the study. 


Important Information
This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

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