The Booms and Busts of Beta Arbitrage

Shiyang Huang (), Xin Liu (), Dong Lou () and Christopher Polk
Additional contact information
Shiyang Huang: Faculty of Business and Economics, The University of Hong Kong, Pokfulam Road, Hong Kong
Xin Liu: School of Finance, Renmin University of China, Beijing 100872, China
Dong Lou: London School of Economics, London WC2A 2AE, United Kingdom; Center for Economic and Policy Research, Washington, DC 20009

Management Science, 2024, vol. 70, issue 8, 5367-5385

Abstract: Low-beta stocks deliver high average returns and low risk relative to high-beta stocks, an opportunity for professional investors to “arbitrage” away. We argue that beta-arbitrage activity generates booms and busts in the strategy’s abnormal trading profits. In times of low arbitrage activity, the beta-arbitrage strategy exhibits delayed correction, taking up to three years for abnormal returns to be realized. In contrast, when arbitrage activity is high, prices overshoot and then revert in the long run. We document a novel positive-feedback channel operating through firm leverage that facilitates these boom-and-bust cycles.

Keywords: beta arbitrage; arbitrage capital; crowded trading; return comovement (search for similar items in EconPapers)
Date: 2024
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http://dx.doi.org/10.1287/mnsc.2023.4929 (application/pdf)

Related works:
Working Paper: The booms and busts of beta arbitrage (2023)
Working Paper: The Booms and Busts of Beta Arbitrage (2016)
Working Paper: The booms and busts of beta arbitrage (2014)
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