Abstract

Since Haugen and Baker (1992), numerous papers have argued that low volatility equities strategies generate performance well above the expectations of equilibrium models such as CAPM.   A few papers have advanced theories on manager behavior such as focus on tracking error and aversion to leverage as potential explanations.  While we do not dispute these ideas, we instead will show that they are unnecessary to explain what has been observed.  The presentation will assert that over long periods, the algebraic differences between arithmetic, geometric and logarithmic measures of return explain much of the effect.  The remainder of the effect arises from investors failing to adjust their CAPM expectations for real world features of the hypothetical “market portfolio” such as skew, kurtosis, non-zero transaction costs and estimation error in beta coefficients.  We will introduce a series of simple algebraic adjustments into CAPM for these defects, and show their combined impact is substantial enough to probably explain the low volatility effect.

Bio

Mr. diBartolomeo is President and founder of Northfield Information Services, Inc.  Based in Boston since 1986, Northfield develops quantitative models of financial markets.   He sits on the board of numerous industry organizations include LQG, IAFE and CQA.  His publication record includes thirty books, book chapters and research journal articles.   In addition, Dan is a Visiting Professor at Brunel University and has been admitted as an expert witness in litigation matters regarding investment management practices and derivatives in both US federal and state courts.

Please RSVP hugh@QWAFAFEW.org

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