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

49 Pages Posted: 29 Nov 2016 Last revised: 20 Dec 2017

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: December 1, 2017

Abstract

We study the risk dynamics of the betting-against-beta anomaly. The strategy shows strong and predictable time variation in risk and no risk-return trade-off. A risk-managed strategy exploiting this achieves an annualized Sharpe ratio of 1.28 with a very high information ratio of 0.94 with respect to the original strategy. Similar strategies for the market, size, value, profitability, and investment factors achieve a much smaller information ratios of 0.15 on average. The large economic benefits of risk-scaling are similar to those of momentum and set these two anomalies apart from other equity factors. Decomposing risk into a market and a specific component we find the specific component drives our results. The performance of the strategy is also observed in international markets and is robust to transaction costs.

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

JEL Classification: G11, G12, G17

Suggested Citation

Barroso, Pedro and Maio, Paulo F., Managing the Risk of the 'Betting-Against-Beta' Anomaly: Does It Pay to Bet Against Beta? (December 1, 2017). 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)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

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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