A Volatility Anomaly refers to an observed deviation from conventional financial theory regarding the relationship between an asset’s risk, typically measured by volatility, and its expected return. Such anomalies suggest that highly volatile assets may not always deliver commensurately higher returns, or even exhibit lower returns, challenging efficient market hypotheses.
Mechanism
The existence of volatility anomalies often stems from market microstructure effects, behavioral biases, or structural constraints within specific asset classes, including certain crypto markets. These mechanisms can lead to mispricing where investors may overpay for the perceived potential of high-volatility assets or overlook stable, less volatile options.
Methodology
The strategic methodology for addressing volatility anomalies involves quantitative research to identify persistent deviations and developing systematic trading strategies to exploit them. This includes constructing low-volatility portfolios, implementing statistical arbitrage strategies, or adjusting risk models to account for these empirical discrepancies, aiming to generate risk-adjusted returns in both traditional and digital asset investment contexts.
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