PT  - JOURNAL ARTICLE
AU  - David Blitz
AU  - Eric Falkenstein
AU  - Pim van Vliet
TI  - Explanations for the Volatility Effect: <em>An Overview</em>
               <br/>
               <em>Based on the CAPM Assumptions</em>
AID  - 10.3905/jpm.2014.40.3.061
DP  - 2014 Apr 30
TA  - The Journal of Portfolio Management
PG  - 61--76
VI  - 40
IP  - 3
4099  - https://pm-research.com/content/40/3/61.short
4100  - https://pm-research.com/content/40/3/61.full
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