Stochastic Portfolio Theory and the Low Beta Anomaly

47 Pages Posted: 15 Nov 2018

See all articles by Anna Agapova

Anna Agapova

Florida Atlantic University

Robert Ferguson

AnswersToGo

Dean Leistikow

Fordham University - Finance Area

Date Written: October 9, 2018

Abstract

Many studies have found that portfolios of low beta stocks have higher growth rates than portfolios of high beta stocks and have concluded that low beta stocks have higher growth rates than high beta stocks. Since rational investor behavior is thought to imply that additional risk is rewarded with additional return, the alleged higher growth rates of low beta versus high beta stocks has been termed a “Low Beta Anomaly” (LBA). However, it is premature to conclude that these observed LBAs are due to stocks’ differential growth rates, because the tested portfolios are traded. Stochastic Portfolio Theory (SPT) shows that traded portfolios’ growth rates can exceed the growth rates of their stocks. This paper presents several SPT models of an LBA that do not require investment constraints, irrational investor behavior, or that low beta stocks have higher growth rates than high beta stocks. These LBAs are due to reconstitution relative volatility capture that favors portfolios of low vs. high beta stocks. They result from trading profit, not differential growth rates between low and high beta stocks. Monte Carlo simulations demonstrate a reconstitution relative volatility capture Low Beta Anomaly that is consistent with the models and the literature.

Keywords: Low Beta Anomaly, Stochastic Portfolio Theory, Low Volatility Anomaly

JEL Classification: G10, G12, G14

Suggested Citation

Agapova, Anna and Ferguson, Robert and Leistikow, Dean, Stochastic Portfolio Theory and the Low Beta Anomaly (October 9, 2018). Available at SSRN: https://ssrn.com/abstract=3271690 or http://dx.doi.org/10.2139/ssrn.3271690

Anna Agapova

Florida Atlantic University ( email )

Finance Department
777 Glades Rd
Boca Raton, FL 33431
United States
561-297-3493 (Phone)

Robert Ferguson (Contact Author)

AnswersToGo ( email )

6815 Edgewater Drve
Apt 208
Coral Gables, FL FL 33133
United States
7868974573 (Phone)

Dean Leistikow

Fordham University - Finance Area ( email )

33 West 60th Street
New York, NY 10023
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
63
Abstract Views
308
rank
351,004
PlumX Metrics