Beta-Arbitrage Strategies: When Do They Work, and Why?

59 Pages Posted: 9 Jan 2012 Last revised: 7 Apr 2014

Tony Berrada

University of Geneva; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Reda Jürg Messikh

Pictet Asset Management SA

Gianluca Oderda

Ersel Asset Management SGR s.p.a.

Olivier V. Pictet

Pictet Asset Management

Date Written: April 7, 2014

Abstract

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.

Keywords: Relative arbitrage, Market diversity, Beta

JEL Classification: G11

Suggested Citation

Berrada, Tony and Messikh, Reda Jürg and Oderda, Gianluca and Pictet, Olivier V., Beta-Arbitrage Strategies: When Do They Work, and Why? (April 7, 2014). Swiss Finance Institute Research Paper No. 11-64. Available at SSRN: https://ssrn.com/abstract=1976285 or http://dx.doi.org/10.2139/ssrn.1976285

Tony Berrada (Contact Author)

University of Geneva ( email )

40, Boulevard du Pont-d'Arve
Genève, CH - 1205
Switzerland

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Reda Jürg Messikh

Pictet Asset Management SA ( email )

Geneva
Switzerland

Gianluca Oderda

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

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

Olivier V. Pictet

Pictet Asset Management ( email )

Geneva
Switzerland

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