Betting against betting against beta

Robert Novy-Marx and Mihail Velikov

Journal of Financial Economics, 2022, vol. 143, issue 1, 80-106

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.

Keywords: Factor models; Beta-arbitrage; Defensive equity; Non-standard methods; Asset pricing (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:143:y:2022:i:1:p:80-106

DOI: 10.1016/j.jfineco.2021.05.023

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