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)

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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

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