The booms and busts of beta arbitrage

Shiyang Huang, Xin Liu, Dong Lou and Christopher Polk

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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: Paul Woolley Centre; Key Program of National Natural Science Foundation of China (NSFC Grant Number 72233003). (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Date: 2023-09-26
New Economics Papers: this item is included in nep-cna
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Published in Management Science, 26, September, 2023. ISSN: 0025-1909

Downloads: (external link)
http://eprints.lse.ac.uk/120807/ Open access version. (application/pdf)

Related works:
Journal Article: The Booms and Busts of Beta Arbitrage (2024)
Working Paper: The Booms and Busts of Beta Arbitrage (2016)
Working Paper: The booms and busts of beta arbitrage (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:120807

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