Critical Finance Review > Vol 11 > Issue 1

Understanding the Performance of Components in Betting Against Beta

Xing Han, Department of Accounting and Finance, University of Auckland Business School, New Zealand, xing.han@auckland.ac.nz
 
Suggested Citation
Xing Han (2022), "Understanding the Performance of Components in Betting Against Beta", Critical Finance Review: Vol. 11: No. 1, pp 1-36. http://dx.doi.org/10.1561/104.00000099

Publication Date: 21 Feb 2022
© 2022 Xing Han
 
Subjects
 
Keywords
G11G12
Beta anomalyReturn decompositionBetting against correlationasset pricing
 

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In this article:
1. Introduction 
2. Data and Variable Construction 
3. Betting Against Beta versus Betting Against Correlation 
4. Decomposition of the Betting Against Beta and the Betting Against Correlation Strategies 
5. Understanding the Cross-Sectional Components of BAB and BAC 
6. Understanding the Time-Series Component of BAB and BAC 
7. Conclusion 
References 

Abstract

Betting against beta (BAB) can be seen as the combination of three investable component portfolios: Two cross-sectional components exploiting the beta anomaly attributable to stock selection and rank weighting scheme, and one time-series component with a dynamic net-long position due to “beta-parity.” Virtually all superior performance of BAB stems from the time-series component. The two cross-sectional components only provide hedging benefits in market downturns. The time-series component has modest portfolio turnover. Betting against correlation (BAC) yields similar findings, except that the two cross-sectional components in BAC outperform on a risk-adjusted basis. However, this effect arises purely from the positive association between firm size and stock correlation. Excluding micro-cap stocks, the performance of BAC shrinks more than that of BAB. Overall, only the time-series component remains as the robust source for the profits of the BA-type strategies.

DOI:10.1561/104.00000099

Online Appendix | 104.00000099_app.pdf

This is the article’s accompanying appendix.

DOI: 10.1561/104.00000099_app