Abstract

https://ssrn.com/abstract=2537050
 


 



Why the Low Volatility Anomaly Will Persist


Eric G. Falkenstein


Pine River Capital Management

December 23, 2016


Abstract:     
Common explanations of the low volatility anomaly involve biases or frictions that cause investors to overpay for high volatility assets, giving them a negative alpha within the CAPM model, yet currently all such mechanisms are either heuristic or partial equilibrium. This paper shows that leverage constraints of Frazzini and Pedersen (2014) alone cannot explain this result if there also exist rational investors. If 3 non-standard assumptions are added — hybrid relative utility, delusional subset of investors, residual systematic risk across beta — then we can capture several facts existing models cannot simultaneously capture: a positive return to the market, positive holdings by rational investors to negative CAPM-alpha stocks, and a negative Security Market Line. New data relevant to these assumptions are presented.

Number of Pages in PDF File: 31

Keywords: volatility effect, anomaly, CAPM, arbitrage, asset pricing, agency effects, behavioral finance, low volatility anomaly

JEL Classification: F20, G11, G12, G14, G15


Open PDF in Browser Download This Paper

Date posted: December 13, 2014 ; Last revised: December 24, 2016

Suggested Citation

Falkenstein, Eric G., Why the Low Volatility Anomaly Will Persist (December 23, 2016). Available at SSRN: https://ssrn.com/abstract=2537050 or http://dx.doi.org/10.2139/ssrn.2537050

Contact Information

Eric G. Falkenstein (Contact Author)
Pine River Capital Management ( email )
601 Calson Parkway, Suite 330
Minnetonka, MN 55347
United States
6123091588 (Phone)
6123091588 (Fax)
Feedback to SSRN


Paper statistics
Abstract Views: 4,047
Downloads: 909
Download Rank: 18,503