The Limits to Arbitrage Revisited: The Low-Risk Anomaly
Hong Kong University of Science & Technology
Florida Atlantic University - Department of Finance
February 4, 2012
Financial Analysts Journal, Forthcoming
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, arbitrageAccepted Paper Series
Date posted: January 12, 2011 ; Last revised: February 6, 2012
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