RT Journal Article
SR Electronic
T1 Explanations for the Volatility Effect: <em>An Overview</em>
               <br/>
               <em>Based on the CAPM Assumptions</em>
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 61
OP 76
DO 10.3905/jpm.2014.40.3.061
VO 40
IS 3
A1 David Blitz
A1 Eric Falkenstein
A1 Pim van Vliet
YR 2014
UL https://pm-research.com/content/40/3/61.abstract
AB The capital asset pricing model (CAPM) predicts a positive relation between risk and return, but empirical studies find that the actual relation is flat, or even negative. This article provides a broad overview of explanations for this volatility effect and categorizes each explanation according to the CAPM assumption to which it relates. Various explanations relate to investor behavior that is rational, given exogenous incentive structures or constraints, which may explain why the volatility effect has been so persistent over time. The authors argue that, although the CAPM may be bad at explaining reality, addressing the reasons for its failure could actually be a normative arbitrage opportunity.TOPICS: Factor-based models, volatility measures, in markets