Article | Financial Analysts Journal | January – February 2011

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

by Malcolm Baker, Brendan Bradley and Jeffrey Wurgler

Abstract

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.

Keywords: Volatility; Stocks; Investment Return; Investment Portfolio; Risk Management; Performance Expectations;

Citation:

Baker, Malcolm, Brendan Bradley, and Jeffrey Wurgler. "Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly." Financial Analysts Journal 67, no. 1 (January–February 2011).