The Limits to Arbitrage Revisited: The Low-Risk Anomaly

Abstract:     
We show that over a long study period (1963-2010), the efficacy of trading the well-known low-volatility stock anomaly more limited than widely believed. In particular, extracting excess returns associated with a zero-cost portfolio is meaningfully hampered by high transaction costs reflecting that the abnormal returns are concentrated among low liquidity stocks. Adding to the challenge, the anomalous excess returns quickly reverse requiring traders to rebalance frequently in attempting to extract profits, thus amplifying liquidity needs. Our findings are unchanged for various approaches to measuring the low-volatility anomaly.

Number of Pages in PDF File: 30

Keywords: low-volatility, arbitrage

Accepted Paper Series