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

@article{Baker2010BenchmarksAL,
  title={Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly},
  author={Malcolm P. Baker and Brendan O. Bradley and Jeffrey Wurgler},
  journal={Financial Analysts Journal},
  year={2010},
  volume={67},
  pages={40 - 54}
}
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. Although there are many candidates for the greatest anomaly in finance, a particularly compelling one is the long-term success of low… 

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