Managing the Risk of the 'Betting-Against-Beta' Anomaly: Does It Pay to Bet Against Beta?

Barroso, Pedro; Maio, Paulo F.

doi:10.2139/ssrn.2876450

Managing the Risk of the 'Betting-Against-Beta' Anomaly: Does It Pay to Bet Against Beta?

30th Australasian Finance and Banking Conference 2017

59 Pages Posted: 29 Nov 2016 Last revised: 15 Mar 2018

Pedro Barroso

UNSW Australia Business School, School of Banking and Finance

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics

Date Written: March 9, 2018

Abstract

The betting-against-beta (BAB) strategy has shown robust proﬁtability. Still, much of its mystery is explained by several non-market risk factors. Yet, we ﬁnd there is a hidden puzzle in BAB: its volatility has unusual predictive power for the strategy performance. Its Sharpe ratio is 1.97 after low-volatility months versus 0.23 after high-volatility ones. Remarkably, the ability of risk factors to explain BAB is totally conﬁned to the subsample of months after high volatility, exactly when the strategy performs (predictably) worse. Controlling for lagged volatility restores the puzzle of the anomaly. Yet, unlike scaled momentum, scaled BAB has large downside risk.

Keywords: Betting-against-beta, BAB, volatility managed portfolios, momentum, market anomalies

JEL Classification: G11, G12, G17

Suggested Citation: Suggested Citation

Barroso, Pedro and Maio, Paulo F., Managing the Risk of the 'Betting-Against-Beta' Anomaly: Does It Pay to Bet Against Beta? (March 9, 2018). 30th Australasian Finance and Banking Conference 2017. Available at SSRN: https://ssrn.com/abstract=2876450 or http://dx.doi.org/10.2139/ssrn.2876450