Journal of Economics and Financial Analysis, 3 (1), pp. 1-26, [2019]
URI: https://ojs.tripaledu.com/jefa/article/view/41/45

Analysis of Equity β Components: New Results and Prospectives in a Low β Framework


University of Pavia, Italy


University of Pavia, Italy


University of Pavia, Italy


DOI: http://dx.doi.org/10.1991/jefa.v3i1.a21

Abstract

This work aims to exploit the so-called "Beta anomaly" regarding the risk-reward relationship, and set up rules and methodologies in order to build new efficient portfolios. It is well known in literature, and among practitioners, that “Low Beta strategies” generate good performances exploiting alpha opportunities. In this paper, we focus on β parameters: we analyze this one and its components (Correlation and Standard Deviation) in order to better understand the drivers and contributions behind the “Low Beta strategies”, and eventually exploit them. We perform an extensive empirical analysis on the S&P500 and the relative sectors, covering more than 10 years. In addition, we follow Long/Short strategies in building portfolios based on β and their components where we compare results against the benchmark.
We also introduce "Walking Beta" approach in order to give a deep and innovative view on the market risk/reward relationship, illustrating different time frames and the evolution of risk parameters.

Keywords

Asset Allocation; Quantitative Portfolio Management; CAPM; Hedge Funds; Correlation; Beta Anomaly.

JEL Classification

G11, G12, G14.

Full Text:

PDF
HTML

References

Ang, A., Hodrick, R., Xing, Y., and Zhang, X. (2009). High Idiosyncratic Volatility and Low Returns: International and Further U.S. Evidence. Journal of Financial Economics, 91(1), pp. 1-23. DOI: 10.1016/j.jfineco.2007.12.005

Asness, C.S., Frazzini, A., and Pedersen, L.H. (2012). Leverage Aversion and Risk Parity. Financial Analysts Journal, 68(1), pp. 47-60. DOI: 10.2469/faj.v68.n1.1

Asness, C.S., Frazzini, A., and Pedersen, L.H. (2014). Low-Risk Investing without Industry Bets. Financial Analysts Journal, 70(4), pp. 24-41. DOI: 10.2469/faj.v70.n4.1

Backer, M., Bradley, B., and Taliaferro, R. (2014). The Low-Risk Anomaly. Decomposition into Micro and Macro Effects. Financial Analysts Journal, 70(2), pp. 43-58. DOI: 10.2469/faj.v70.n2.2

Baker, M., Hoeyer, M.F., and Wurgler, J. (2016). The Risk Anomaly Tradeoff of Leverage. NBER Working Paper, No. 22116.

Baker, N.L., and Haugen, R.A. (2012). Low Risk Stock Outperform within all Observable Markets of the World. Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2055431

Black, F. (1972). Capital Market Equilibrium with Restricted Borrowing. The Journal of Business, 45(3), pp. 444-455.

Black, F. (1993). Beta and Return. Journal of Portfolio Management, 20(1), pp. 8-18.

Blitz, D.C., and Van Vilet, P. (2007). The Volatility Effect: Lower Risk without Lower Return. Journal of Portfolio Management, 34(1), pp. 102-113. DOI: 10.3905/jpm.2007.698039

Cederburg, S., and O’Doherty, S. (2016). Does it Pay to Bet Against Beta? On the Conditional Performance of the Beta Anomaly. Journal of Finance, 71(2), pp. 737-774. DOI: 10.1111/jofi.12383

Cowan, D., and Wilderman, S. (2011). Re-ThinkingRisk: What the Beta Puzzle Tells Us about Investing. White paper, GMO.

Carvalho, R.L, Xiao, L., and Moulin, P. (2002). Demystifying Equity Risk-Based Strategies: A Simple Alpha Plus Beta Description. Journal of Portfolio Management, 38(3), pp. 56-70.

Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of any Asset. University Edition, 3rd Edition.

Fama, E., French, K.R. (2003). The Capital Asset Pricing Model: Theory and Evidence. CRSP Working Paper No. 550; Tuck Business School Working Paper No. 03-26.

Fama, E., and French, K.R. (2004). The Capital Asset Pricing Model: Theory and Evidence. Journal of Economic Perspectives, 18(3), pp. 25-46.

Frazzini, A., and Pedersen, L.H. (2014). Betting Against the Beta. Journal of Financial Economics, 111(1), pp. 1-25. DOI: 10.1016/j.jfineco.2013.10.005

Haugen, R.A., and Heins, A.J. (1972). On the Evidence Supporting the Existence of Risk Premiums in the Capital Markets. Wisconsin Working Paper.

Hurd, M. (2001). Market Neutral Investing: The basics of Theory and Construction, available at: https://pdfs.semanticscholar.org/8b45/2583b33a5a91367734a928553bd3583cdb0a.pdf.

Jacobs, B.I., and Levy, K.N. (2005). Market Neutral Strategies. John Wiley & Sons.

Jagannathan, R., and Ma, T. (2003). Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraints Helps. Journal of Finance, 58(4), pp. 1651-1684.

Leinowitz, M.L., Emrich, S., and Bova, A. (2009). Modern Portfolio Management. Active Long/Short 130/30 Equity Strategies.

Lintner, J. (1965).The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets. Review of Economics and Statistics, 47(1), pp. 13-37.

Sharpe, W.F. (1964). A Simplified Model for Portfolio Analysis. Management Science, 9(2), pp. 277-293.

Turan, G., Stephen, B., Murray, S., and Tang, Y. (2014). A Lottery Demand-Based Explanation of the Beta Anomaly. Journal of Financial and Quantitative Analysis, 52(6), pp. 2369-2397. DOI: 10.1017/S0022109017000928

Zlotnikov, V., Larson, A.M., and Clavel C. (2012). The Low-Beta Anomaly – Easy to Demonstrate, Harder to Explain, Difficult to Exploit. Bernstein White Book - Quantitative Research, pp. 1-34.




Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.