Betting Against Betting Against Beta
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.
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Work Title | Betting Against Betting Against Beta |
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License | CC BY-NC-ND 4.0 (Attribution-NonCommercial-NoDerivatives) |
Work Type | Article |
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Publication Date | January 2022 |
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Deposited | April 04, 2022 |
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