Betting Against (Bad) Beta
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arXiv
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| Format: | Preprint |
| Published: |
2024
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| _version_ | 1866917765881790464 |
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| author | Herculano, Miguel C. |
| author_facet | Herculano, Miguel C. |
| contents | Frazzini and Pedersen (2014) 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 (2004), 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. We 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. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2409_00416 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | Betting Against (Bad) Beta Herculano, Miguel C. Portfolio Management Frazzini and Pedersen (2014) 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 (2004), 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. We 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. |
| title | Betting Against (Bad) Beta |
| topic | Portfolio Management |
| url | https://arxiv.org/abs/2409.00416 |