A pair of papers recently examined two different aspects of this anomaly. Xi Li, Rodney Sullivan and Luis Garcia-Feijóo, the authors of the 2013 study, “The Limits to Arbitrage and the Low-Volatility Anomaly,” explored whether the abnormal returns associated with the low-volatility anomaly can be effectively captured, or whether the returns are actually subsumed by some limits to investors effectively arbitraging them away.

To accomplish their objective, the authors examined the role of portfolio rebalancing and transaction costs in an investor’s attempt to extract profits from the low-risk anomaly. The study, which appeared in the January/February 2014 issue of Financial Analysts Journal, covered the period from July 1963 through December 2010. The following is a summary of the authors’ findings:

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