Small-Minus-Big Predicts Betting-Against-Beta: Implications for International Equity Allocation and Market Timing

This article has been accepted for publication in INVESTMENT ANALYSTS JOURNAL, published by Taylor & Francis.

35 Pages Posted: 19 Aug 2018 Last revised: 27 Oct 2020

See all articles by Adam Zaremba

Adam Zaremba

Poznań University of Economics and Business; Montpellier Business School

Date Written: August 6, 2018

Abstract

We demonstrate a strong relationship between short-term small-firm premium and future low-beta anomaly performance. Rises (declines) in small firm prices temporarily improve (deteriorate) funding conditions, benefiting (impairing) the short-run returns on the low-beta strategy. To investigate this phenomenon, we examine returns on betting-against-beta (BAB) and small-minus-big (SMB) factor portfolios in 24 developed markets for the years 1989–2018. A zero-investment strategy of going long (short) in BAB factors in the quintile of countries with the highest (lowest) three-month SMB return produces a mean return of 1.46% per month. The effect is robust to controlling for major risk factors in equity markets, alternative portfolio construction methods, and subperiod analysis. The predictability of BAB performance by SMB returns is also present in the time-series of individual country returns, forming the ground for effective timing in the low-beta strategies.

Keywords: Small-Firm Premium, Size Effect, Low-Beta Anomaly, Small-Minus-Big, Betting-Against-Beta, SMB, BAB, Asset Pricing, Factor Timing, International Equity Allocation

JEL Classification: G12, G14, G15

Suggested Citation

Zaremba, Adam, Small-Minus-Big Predicts Betting-Against-Beta: Implications for International Equity Allocation and Market Timing (August 6, 2018). This article has been accepted for publication in INVESTMENT ANALYSTS JOURNAL, published by Taylor & Francis., Available at SSRN: https://ssrn.com/abstract=3227047 or http://dx.doi.org/10.2139/ssrn.3227047

Adam Zaremba (Contact Author)

Poznań University of Economics and Business ( email )

al. Niepodległości 10
Poznań, 61-875
Poland

HOME PAGE: http://adamzaremba.pl

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, Occitanie 34000
France

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