Betting Against Beta in the Indian Market
22 Pages Posted: 10 Jul 2014
Date Written: July 4, 2014
Recent empirical evidence from different markets suggests that the security market line is flatter than posited by CAPM. This flatness implies that a portfolio long in low-beta assets and short in high-beta assets would earn positive returns. Frazzini and Pedersen (2014) conceptualize a BAB factor that tracks such a portfolio. We find that a similar BAB factor earns significant positive returns in India. The returns on the BAB factor dominate the returns on the size, value and momentum factors. We also find that stocks with higher volatility earn relatively lower returns. These findings indicate overweighting of riskier assets by leverage constrained investors in the Indian market.
Keywords: CAPM, Betting against beta, BAB factor, leverage constraint, emerging markets
JEL Classification: G11, G12, G14, G15
Suggested Citation: Suggested Citation