Faculty Digital Archive

Archive@NYU >
Stern School of Business >
Finance Working Papers >

Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/29537

Title: A Behavioral Finance Explanation for the Success of Low Volatility Portfolios
Authors: Wurgler, Jeffrey
Bradley, Brendan
Baker, Malcolm
Issue Date: 19-Jan-2010
Series/Report no.: FIN-09-029
Abstract: Arguably the most remarkable anomaly in finance is the violation of the risk‐return tradeoff within the stock market: Over the past 40 years, high volatility and high beta stocks in U.S. markets have substantially underperformed low volatility and low beta stocks. We propose an explanation that combines the average investor's preference for risk and the typical institutional investor's mandate to maximize the ratio of excess returns to tracking error relative to a fixed benchmark (the information ratio) rather than the Sharpe ratio. Models of delegated asset management show that such mandates discourage arbitrage activity in both high alpha, low beta stocks and low alpha, high beta stocks. This explanation is consistent with several aspects of the low volatility anomaly including why it has only strengthened even as institutional investors have become more numerous.
URI: http://hdl.handle.net/2451/29537
Appears in Collections:Finance Working Papers

Files in This Item:

File Description SizeFormat
wp0929.pdf308.97 kBAdobe PDFView/Open

Items in Faculty Digital Archive are protected by copyright, with all rights reserved, unless otherwise indicated.

 

The contents of the FDA may be subject to copyright, be offered under a Creative Commons license, or be in the public domain.
Please check items for rights statements. For information about NYU’s copyright policy, see http://www.nyu.edu/footer/copyright-and-fair-use.html 
Valid XHTML 1.0 | CSS