Betting Against Betting Against Beta

46 Pages Posted: 2 Jan 2019

See all articles by Robert Novy-Marx

Robert Novy-Marx

Simon Business School, University of Rochester; National Bureau of Economic Research (NBER)

Mihail Velikov

Pennsylvania State University

Date Written: November 2018


Frazzini and Pedersen’s (2014) Betting Against Beta (BAB) factor is based on the same basic idea as Black’s (1972) beta-arbitrage, but its astonishing performance has generated academic interest and made it highly influential with practitioners. This performance is driven by non-standard procedures used in its construction that effectively, but non-transparently, equal weight stock returns. For each dollar invested in BAB, the strategy commits on average $1.05 to stocks in the bottom 1% of total market capitalization. BAB earns positive returns after accounting for transaction costs, but earns these by tilting toward profitability and investment, exposures for which it is fairly compensated. Predictable biases resulting from the paper’s non-standard beta estimation procedure drive results presented as evidence supporting its underlying theory.

Keywords: Factor models, beta-arbitrage, defensive equity, non-standard methods, asset pricing

JEL Classification: G12

Suggested Citation

Novy-Marx, Robert and Velikov, Mihail, Betting Against Betting Against Beta (November 2018). Available at SSRN: or

Robert Novy-Marx

Simon Business School, University of Rochester ( email )

Rochester, NY 14627
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mihail Velikov (Contact Author)

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

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