Small-Minus-Big Predicts Betting-Against-Beta: Implications for International Equity Allocation and Market Timing
54 Pages Posted: 19 Aug 2018 Last revised: 25 Aug 2018
Date Written: August 6, 2018
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: Suggested Citation