41 Pages Posted: 29 Nov 2016 Last revised: 18 Aug 2017
Date Written: November 28, 2016
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 ratio 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.
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? (November 28, 2016). Available at SSRN: https://ssrn.com/abstract=2876450