A Proof of the Outperformance of Beta Arbitrage Strategies

13 Pages Posted: 20 Apr 2010

See all articles by Reda Jürg Messikh

Reda Jürg Messikh

Pictet Asset Management SA

Gianluca Oderda

Ersel Asset Management SGR s.p.a.

Date Written: April 20, 2010

Abstract

By modeling asset returns via Brownian processes, we construct dynamic portfolios whose weights, relative to the market portfolio, are inflated (respectively, deflated) depending on high (respectively, low) levels of ex-ante beta for the corresponding assets. We establish under mild conditions that these portfolios are dominated by the market portfolio in finite time almost surely. Our result proves the out-performance potential of beta arbitrage strategies, which tilt portfolios towards low-beta holdings and away from high-beta holdings. Such strategies have recently been the subject of considerable interest in the financial community.

Keywords: Ex-ante variance, ex-ante beta-weighted portfolios, beta arbitrage strategies

JEL Classification: G11, C60, C62

Suggested Citation

Messikh, Reda Jürg and Oderda, Gianluca, A Proof of the Outperformance of Beta Arbitrage Strategies (April 20, 2010). Available at SSRN: https://ssrn.com/abstract=1534183 or http://dx.doi.org/10.2139/ssrn.1534183

Reda Jürg Messikh

Pictet Asset Management SA ( email )

Geneva
Switzerland

Gianluca Oderda (Contact Author)

Ersel Asset Management SGR s.p.a. ( email )

Piazza Solferino 11
Torino, 10121
Italy
+390115520622 (Phone)
+390115520241 (Fax)

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