Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly

Posted: 23 Jan 2011

See all articles by Malcolm P. Baker

Malcolm P. Baker

Harvard Business School; National Bureau of Economic Research (NBER)

Brendan Bradley

Acadian Asset Management Inc., USA

Jeffrey Wurgler

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: January 21, 2011

Abstract

Contrary to basic finance principles, high-beta and high-volatility stocks have long underperformed low-beta and low-volatility stocks. This anomaly may be partly explained by the fact that the typical institutional investor’s mandate to beat a fixed benchmark discourages arbitrage activity in both high-alpha, low-beta stocks and low-alpha, high-beta stocks.

Keywords: Behavioral Finance, Behavioral Biases, Limits to Arbitrage, Equity Investments, Portfolio Management: Risk Management

Suggested Citation

Baker, Malcolm P. and Bradley, Brendan and Wurgler, Jeffrey A., Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly (January 21, 2011). Financial Analysts Journal, Vol. 67, No. 1, 2011, Available at SSRN: https://ssrn.com/abstract=1745108

Malcolm P. Baker (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States
617-495-6566 (Phone)

HOME PAGE: http://www.people.hbs.edu/mbaker

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Brendan Bradley

Acadian Asset Management Inc., USA ( email )

Jeffrey A. Wurgler

NYU Stern School of Business ( email )

Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States
212-998-0367 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jwurgler/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
1,867
PlumX Metrics