Jan 17, 2012
Q & A
Baker, Bradley and Wurgler (FAJ 2011) find that low-volatility stocks in the US outperform high-volatility stocks and attribute this apparent anomaly to investor behavioral biases as well as limits to arbitrage. What do you make of their argument?
EFF/KRF: It is just that, an argument. We have known since the '70s that the relation between beta and average return is much flatter than predicted by the CAPM. Their measure of total volatility is highly correlated with beta. They give a behavioral story, but other stories are consistent with their results. In any case, the CAPM has other more serious problems, and we think a multifactor model is necessary to capture, for example, the value premium in average returns, which shows little relation to beta.
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ABOUT FAMA AND FRENCH
Eugene F. Fama
The Robert R.
McCormick Distinguished
Service Professor of
Finance at the University
of Chicago Booth School
of Business
Kenneth R. French
The Carl E. and Catherine
M. Heidt Professor of
Finance at the Tuck
School of Business at
Dartmouth College
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Dimensional Fund Advisors Ltd. is authorised and regulated in the United Kingdom by the Financial Services Authority (FRN: 150100), is registered in England and Wales under Company No. 02569601 and VAT No. 577327607. The registered office address of Dimensional Fund Advisors Ltd. is 7 Down Street, London, W1J 7AJ, United Kingdom. Dimensional Fund Advisors Ltd. is a subsidiary of Dimensional Fund Advisors.