Do limits to arbitrage explain the benefits of volatility-managed portfolios?

Pedro Barroso, Andrew Detzel*

*Autor correspondente para este trabalho

Resultado de pesquisarevisão de pares

2 Citações (Scopus)

Resumo

We investigate whether transaction costs, arbitrage risk, and short-sale impediments explain the abnormal returns of volatility-managed equity portfolios. Even using six cost-mitigation strategies, after transaction costs, volatility management of asset-pricing factors besides the market return generally produces zero abnormal returns and significantly reduces Sharpe ratios. In contrast, abnormal returns of the volatility-managed market portfolio are robust to transaction costs and concentrated in the most easily arbitraged stocks, those with low arbitrage risk and impediments to short selling. Moreover, the managed market strategy only provides superior performance when sentiment is high, consistent with prior theory that sentiment traders underreact to volatility.
Idioma originalEnglish
Páginas (de-até)744-767
Número de páginas24
RevistaJournal of Financial Economics
Volume140
Número de emissão3
DOIs
Estado da publicaçãoPublished - jun 2021

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