The Volatility Puzzle of the Beta Anomaly

59 Pages Posted: 12 Jul 2021 Last revised: 6 Mar 2023

See all articles by Pedro Barroso

Pedro Barroso

CATÓLICA-LISBON School of Business & Economics

Andrew L. Detzel

Baylor University - Hankamer School of Business

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics

Date Written: March 3, 2023

Abstract

This paper shows that leading theories of the beta anomaly fail to explain the anomaly’s conditional performance. Abnormal returns and Sharpe ratios of betting-against-beta (BAB) factors rise following months with below-median realized volatility, even controlling for mispricing, limits to arbitrage, lottery preferences, analyst disagreement, and sentiment. Moreover, the leverage constraints theory counterfactually predicts that market and BAB Sharpe ratios increase with volatility. We further show that institutional investors shift their demand from high- to low-beta stocks as volatility increases, and the resulting price impact is sufficient to explain the difference in abnormal BAB returns between high- and low-volatility states.

Keywords: Betting-against-beta, time-varying risk, realized volatility, risk factors, scaled factors, anomalies, lottery preferences, leverage constraints

JEL Classification: G11, G12, G17

Suggested Citation

Barroso, Pedro and Detzel, Andrew L. and Maio, Paulo F., The Volatility Puzzle of the Beta Anomaly (March 3, 2023). Available at SSRN: https://ssrn.com/abstract=3882108 or http://dx.doi.org/10.2139/ssrn.3882108

Pedro Barroso (Contact Author)

CATÓLICA-LISBON School of Business & Economics ( email )

Palma de Cima
Lisbon, Lisboa 1649-023
Portugal

HOME PAGE: http://https://clsbe.lisboa.ucp.pt/person/pedro-monteiro-e-silva-barroso

Andrew L. Detzel

Baylor University - Hankamer School of Business ( email )

Waco, TX 76798
United States

HOME PAGE: http://andrewdetzel.com

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 Helsinki
Finland

HOME PAGE: http://sites.google.com/site/paulofmaio/home

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