Managing the Risk of the Beta Anomaly

43 Pages Posted: 29 Nov 2016 Last revised: 28 Jun 2021

See all articles by Pedro Barroso

Pedro Barroso

CATÓLICA-LISBON School of Business & Economics

Andrew L. Detzel

University of Denver - Daniels College of Business

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics

Date Written: June 27, 2021

Abstract

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

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

Pedro Barroso (Contact Author)

CATÓLICA-LISBON School of Business & Economics ( email )

Palma de Cima
Lisbon, Lisboa 1649-023
Portugal

HOME PAGE: http://https://clsbe.lisboa.ucp.pt/person/pedro-monteiro-e-silva-barroso

Andrew L. Detzel

University of Denver - Daniels College of Business ( email )

2101 S. University Blvd
Denver, CO 80208
United States

HOME PAGE: http://portfolio.du.edu/adetzel

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 Helsinki
Finland

HOME PAGE: http://sites.google.com/site/paulofmaio/home

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