Do Limits to Arbitrage Explain the Benefits of Volatility-Managed Portfolios?

40 Pages Posted: 18 Dec 2017 Last revised: 5 Jun 2018

See all articles by Pedro Barroso

Pedro Barroso

UNSW Australia Business School, School of Banking and Finance

Andrew L. Detzel

University of Denver - Daniels College of Business

Date Written: April 3, 2018

Abstract

We investigate whether limits to arbitrage explain the abnormal returns of volatility-managed portfolios. To the contrary, these abnormal returns are negligible in long-only portfolios consisting of hard-to-arbitrage stocks. Moreover, utility gains from volatility management are at least twice as high for out-of-sample mean-variance-efficient portfolios constructed from easy-to-arbitrage stocks than from hard-to-arbitrage stocks. These results contrast with the common finding that anomalies are stronger where arbitrage is difficult. We also show the abnormal returns of volatility-managed portfolios are only significant in times of high liquidity and sentiment, consistent with models where unsophisticated traders under-react to informed order flow in such times.

Keywords: Volatility-managed portfolios, limits to arbitrage, anomalies

JEL Classification: G11, G12, G14

Suggested Citation

Barroso, Pedro and Detzel, Andrew L., Do Limits to Arbitrage Explain the Benefits of Volatility-Managed Portfolios? (April 3, 2018). Available at SSRN: https://ssrn.com/abstract=3088828 or http://dx.doi.org/10.2139/ssrn.3088828

Pedro Barroso

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Andrew L. Detzel (Contact Author)

University of Denver - Daniels College of Business ( email )

2101 S. University Blvd
Denver, CO 80208
United States

HOME PAGE: http://portfolio.du.edu/adetzel

Register to save articles to
your library

Register

Paper statistics

Downloads
120
Abstract Views
570
rank
230,209
PlumX Metrics