The Betting Against Beta Anomaly: Fact or Fiction?

16 Pages Posted: 16 Dec 2015

See all articles by Axel Buchner

Axel Buchner

University of Passau; CEPRES - Center of Private Equity Research

Niklas Wagner

Passau University

Date Written: December 15, 2015


This paper suggests an alternative explanation for the recently documented betting against beta anomaly. Given that the equity of a levered firm is equivalent to a call option on firm assets and option returns are non-linearly related to underlying stock returns, linear CAPM-type regressions are generally misspecified. We derive theoretical expressions for the pricing error and analyze its magnitude using numerical examples. Consistent with the empirical findings of Frazzini and Pedersen (2014), our pricing errors are negative, increase with leverage, and become economically significant for higher levels of firm leverage.

Keywords: Asset Pricing, Performance Measurement, Abnormal Return, Systematic Risk

JEL Classification: G11, G12, G13, G15

Suggested Citation

Buchner, Axel and Wagner, Niklas F., The Betting Against Beta Anomaly: Fact or Fiction? (December 15, 2015). Available at SSRN: or

Axel Buchner (Contact Author)

University of Passau ( email )

Innstra├če 27
Passau, 94030

CEPRES - Center of Private Equity Research ( email )

Max-Joseph-Strasse 7
Munich, 80333

Niklas F. Wagner

Passau University ( email )

Innstrasse 27
Passau, 94030

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