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Does It Pay to Bet Against Beta? On the Conditional Performance of the Beta Anomaly

92 Pages Posted: 23 Apr 2013 Last revised: 24 Jun 2015

Scott Cederburg

University of Arizona - Department of Finance

Michael S. O'Doherty

University of Missouri at Columbia - Department of Finance

Date Written: June 22, 2015

Abstract

Prior studies find that a strategy that buys high-beta stocks and sells low-beta stocks has a significantly negative unconditional Capital Asset Pricing Model (CAPM) alpha, such that it appears to pay to "bet against beta." We show, however, that the conditional beta for the high-minus-low beta portfolio covaries negatively with the equity premium and positively with market volatility. As a result, the unconditional alpha is a downward biased estimate of the true alpha. We model the conditional market risk for beta-sorted portfolios using instrumental variables methods and find that the conditional CAPM resolves the beta anomaly.

Keywords: Conditional CAPM, Beta Anomaly, Beta-Return Relation

JEL Classification: G10, G12

Suggested Citation

Cederburg, Scott and O'Doherty, Michael S., Does It Pay to Bet Against Beta? On the Conditional Performance of the Beta Anomaly (June 22, 2015). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2255023 or http://dx.doi.org/10.2139/ssrn.2255023

Scott Cederburg (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Michael S. O'Doherty

University of Missouri at Columbia - Department of Finance ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States

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