Managing the Risk of the Beta Anomaly

Betting-against-beta (BAB) portfolios produce large CAPM alphas. But these abnormal returns are well explained by equity factors. Operating profitability, investment, and momentum factors subsume the low-beta anomaly. However, volatility-managed versions of the same low-beta portfolios are more puzzling. Volatility management increases Sharpe ratios and risk-adjusted returns for all BAB portfolios. Splitting the sample by lagged volatility, the average Sharpe ratio of BAB portfolios increases from 0.28 after risky months to 1.32 after safe months. By splitting the total variance of each BAB portfolio into systematic and idiosyncratic components, the latter drives the gains of timing volatility.

Keywords: Betting-against-beta, time-varying risk, realized volatility, risk factors, scaled factors, market anomalies

JEL Classification: G11, G12, G17

Suggested Citation: Suggested Citation

Barroso, Pedro and Detzel, Andrew L. and Maio, Paulo F., Managing the Risk of the Beta Anomaly (June 27, 2021). 30th Australasian Finance and Banking Conference 2017, Available at SSRN: https://ssrn.com/abstract=2876450 or http://dx.doi.org/10.2139/ssrn.2876450