Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly

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Financial Analysts Journal
January/February 2011 | Vol. 67 | No. 1 | 15 pages
Source: CFA Institute
Malcolm Baker Brendan Bradley Jeffrey Wurgler

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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.

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