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

39 Pages Posted: 23 Aug 2012

See all articles by Tony Berrada

Tony Berrada

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Reda Jürg Messikh

Pictet Asset Management SA

Gianluca Oderda

Ersel Asset Management SGR s.p.a.

Olivier V. Pictet

Pictet Asset Management

Date Written: August 23, 2012

Abstract

Contrary to what traditional asset pricing would imply, a strategy that bets against beta, i.e. long in low beta stocks and short in high beta stocks, tends to out-perform the market. This puzzling empirical fact can be explained through the concept of relative arbitrage. Considering a market in which diversity is maintained, i.e. no single stock can dominate the entire market, we show that beta-arbitrage strategies out-perform the market portfolio with unit probability in finite time. We use the theoretical decomposition of beta-arbitrage excess return to provide empirical support to our explanation on equity country indices, equity sectors and individual stocks. 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? (August 23, 2012). 25th Australasian Finance and Banking Conference 2012. Available at SSRN: https://ssrn.com/abstract=2135288 or http://dx.doi.org/10.2139/ssrn.2135288

Tony Berrada (Contact Author)

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
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

Register to save articles to
your library

Register

Paper statistics

Downloads
447
Abstract Views
1,751
rank
205,029
PlumX Metrics