Abstract

http://ssrn.com/abstract=1585031
 
 

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Benchmarks as Limits to Arbitrage: Understanding the Low Volatility Anomaly


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)

March 2010

NYU Working Paper No. 2451/29593

Abstract:     
Over the past 41 years, high volatility and high beta stocks have substantially underperformed low volatility and low beta stocks in U.S. markets. We propose an explanation that combines the average investor's preference for risk and the typical institutional investor’s mandate to maximize the ratio of excess returns and tracking error relative to a fixed benchmark (the information ratio) without resorting to leverage. Models of delegated asset management show that such mandates discourage arbitrage activity in both high alpha, low beta stocks and low alpha, high beta stocks. This explanation is consistent with several aspects of the low volatility anomaly including why it has strengthened in recent years even as institutional investors have become more dominant.

Number of Pages in PDF File: 26

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Date posted: April 6, 2010 ; Last revised: September 10, 2013

Suggested Citation

Baker, Malcolm P. and Bradley, Brendan and Wurgler, Jeffrey, Benchmarks as Limits to Arbitrage: Understanding the Low Volatility Anomaly (March 2010). NYU Working Paper No. 2451/29593. Available at SSRN: http://ssrn.com/abstract=1585031

Contact Information

Malcolm P. Baker
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 (Contact Author)
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
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