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Article

Explanations for the Volatility Effect: An Overview
Based on the CAPM Assumptions

David Blitz, Eric Falkenstein and Pim van Vliet
The Journal of Portfolio Management Spring 2014, 40 (3) 61-76; DOI: https://doi.org/10.3905/jpm.2014.40.3.061
David Blitz
is the head of quantitative equity research at Robeco Asset Management in Rotterdam, The Netherlands.
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  • For correspondence: d.c.blitz@robeco.com
Eric Falkenstein
is a quantitative strategist at Pine River Capital Management in Minnetonka, MN.
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  • For correspondence: eric.falkenstein@prcm.com
Pim van Vliet
is a portfolio manager for low-volatility strategies at Robeco Asset Management in Rotterdam, The Netherlands.
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  • For correspondence: p.van.vliet@robeco.com
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Abstract

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.

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The Journal of Portfolio Management: 40 (3)
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Explanations for the Volatility Effect: An Overview
Based on the CAPM Assumptions
David Blitz, Eric Falkenstein, Pim van Vliet
The Journal of Portfolio Management Apr 2014, 40 (3) 61-76; DOI: 10.3905/jpm.2014.40.3.061

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Explanations for the Volatility Effect: An Overview
Based on the CAPM Assumptions
David Blitz, Eric Falkenstein, Pim van Vliet
The Journal of Portfolio Management Apr 2014, 40 (3) 61-76; DOI: 10.3905/jpm.2014.40.3.061
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  • Article
    • Abstract
    • CAPM ASSUMPTION (I): NO CONSTRAINTS
    • CAPM ASSUMPTION (II): INVESTOR UTILITY
    • CAPM ASSUMPTION (III): ONE-PERIOD MODEL
    • CAPM ASSUMPTION (IV): INFORMATION IS COMPLETE AND RATIONALLY PROCESSED
    • IMPLICATIONS
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
  • PDF

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