Betting Against (Bad) Beta

Miguel C. Herculano

Quantitative Finance, 2025, vol. 25, issue 6, 949-958

Abstract: The Betting Against Beta (BAB) factor is based on the idea that high beta assets trade at a premium and low beta assets trade at a discount due to investor funding constraints. However, as argued by Campbell and Vuolteenaho [Bad beta, good beta. Am. Econ. Rev., 2004, 94, 1249–1275.] beta comes in ‘good’ and ‘bad’ varieties. While gaining exposure to low-beta, BAB factors fail to recognize that such a portfolio may tilt towards bad-beta. I propose a Betting Against Bad Beta factor, built by double-sorting on beta and bad-beta and find that it improves the overall performance of BAB strategies though its success relies on proper transaction cost mitigation.

Date: 2025
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DOI: 10.1080/14697688.2025.2517270

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