Managing the Risk of the Beta Anomaly

Barroso, Pedro; Maio, Paulo F.

doi:10.2139/ssrn.2876450

Managing the Risk of the Beta Anomaly

30th Australasian Finance and Banking Conference 2017

58 Pages Posted: 29 Nov 2016 Last revised: 16 Dec 2018

See all articles by Pedro Barroso

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 16, 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 reinforces 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 Beta Anomaly (December 16, 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