Work

The Limits to Arbitrage and the Low-Volatility Anomaly

Year: 2014

Type: article

Abstract: 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.

Source: Financial Analysts Journal

DOI: 10.2469/faj.v70.n1.3

Authors: Xi Li, Rodney N Sullivan, Luis Garcia-Feijoo

Institutions: Hong Kong University of Science and Technology, University of Arkansas at Fayetteville, CFA Institute, University of Virginia, Florida Atlantic University

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W2170758799

FWCI: 17.69

Cites: 46

Cited by: 72

Related to: 10