59 Pages Posted: 9 Jan 2012 Last revised: 7 Apr 2014
Date Written: April 7, 2014
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: 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