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Betting against betting against beta

Author

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  • Novy-Marx, Robert
  • Velikov, Mihail

Abstract

Frazzini and Pedersen’s (2014) Betting Against Beta (BAB) factor is based on the same basic idea as Blacks’(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. Predictable biases resulting from Frazzini and Pedersen’s non-standard beta estimation procedure drive results presented as evidence supporting BAB’s underlying theory.

Suggested Citation

  • Novy-Marx, Robert & Velikov, Mihail, 2022. "Betting against betting against beta," Journal of Financial Economics, Elsevier, vol. 143(1), pages 80-106.
    • Handle: RePEc:eee:jfinec:v:143:y:2022:i:1:p:80-106
    DOI: 10.1016/j.jfineco.2021.05.023
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    References listed on IDEAS

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    Cited by:

    1. Andrew Detzel & Robert Novy‐Marx & Mihail Velikov, 2023. "Model Comparison with Transaction Costs," Journal of Finance, American Finance Association, vol. 78(3), pages 1743-1775, June.
    2. Insana, Alessandra, 2023. "Betting against beta with intraday and overnight signals," International Review of Financial Analysis, Elsevier, vol. 86(C).
    3. James Yae & Yang Luo, 2023. "Robust monitoring machine: a machine learning solution for out-of-sample R $$^2$$ 2 -hacking in return predictability monitoring," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-28, December.
    4. Joshua Traut, 2023. "What we know about the low-risk anomaly: a literature review," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 37(3), pages 297-324, September.

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    More about this item

    Keywords

    Factor models; Beta-arbitrage; Defensive equity; Non-standard methods; Asset pricing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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