92 Pages Posted: 23 Apr 2013 Last revised: 24 Jun 2015
Date Written: June 22, 2015
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: 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
By Andrew Ang