Betting against betting against beta

Robert Novy-Marx, Mihail Velikov

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

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.

Original languageEnglish (US)
JournalJournal of Financial Economics
DOIs
StateAccepted/In press - 2021

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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