Beta-Arbitrage Strategies: When Do They Work, and Why?
University of Geneva; Swiss Finance Institute
Reda Jürg Messikh
Pictet Asset Management SA
Ersel Asset Management SGR s.p.a.
Olivier V. Pictet
Pictet Asset Management
April 7, 2014
Swiss Finance Institute Research Paper No. 11-64
Contrary to what traditional asset pricing would imply, a strategy that bets against beta, by going long in low beta stocks and short in high beta stocks, tends to outperform the market. We consider a market in which diversity is maintained, i.e. no single stock can dominate the entire market, and we show that beta-arbitrage strategies mechanically out-perform the market portfolio. We provide empirical support to our explanation on equity country indices, equity sectors, individual stocks, and stock portfolios. Finally, we show how to construct optimal beta- arbitrage strategies that maximize the expected return relative to a given benchmark.
Number of Pages in PDF File: 59
Keywords: Relative arbitrage, Market diversity, Beta
JEL Classification: G11working papers series
Date posted: January 9, 2012 ; Last revised: April 7, 2014
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo2 in 0.437 seconds