The Limits to Arbitrage and the Low-Volatility Anomaly
Sullivan, Rodney N.
|Source||Financial analysts journal , v. 70, (1), January 2014, p. 52-63|
|Summary||The authors found that over 1963-2010, the existence and trading efficacy of the low-volatility stock anomaly were more limited than widely believed. For example, they found no anomalous returns for equal-weighted long short (low-risk minus high-risk) portfolios and that alpha is largely eliminated when omitting low-priced stocks from value-weighted long short portfolios. Furthermore, performance of long short portfolios was significantly reduced by high transaction costs, reflecting the finding that the abnormal returns were concentrated among low-liquidity and smaller stocks. Amplifying liquidity needs, the anomalous excess returns quickly reversed, requiring frequent rebalancing. The authors' findings have meaningful implications for implementing low-risk equity portfolio strategies.|
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