Betting Against Beta
Posted: Fri Oct 09, 2020 11:07 am
As the resident factor maven here on the forum you'd think I'd have a staunch opinion on this matter, but I actually don't. Does anyone here employ the Betting Against Beta (BAB) factor in their equity allocation?
The idea behind Betting Against Beta is that the security market line specified by the CAPM is flatter and much less steep than predicted by theory. The consequence is that while high beta stocks do indeed have higher returns, their risk adjusted return is lower than low beta stocks. (Some data go further to imply that low beta stocks have higher risk-adjusted returns AND higher returns in an absolute sense, but that's likely regime dependent.)
It is sensible that the security market line might be flatter than expected because of funding and leverage constraints. Investors want higher returns but they have limited access/willingness to use leverage to get those returns. As a result, they overweight high beta stocks (whose prices get bid up), and underweight low beta stocks.
The folks at AQR consider Betting Against Beta to be a legit factor while others such as Swedroe consider it to be superseded by existing factors.
Thoughts? Does anyone here employ BAB? Why or why not? Do you think it's a legit factor?
Some papers:
https://www.aqr.com/Insights/Research/J ... ainst-Beta
http://pages.stern.nyu.edu/~lpederse/pa ... stBeta.pdf
https://www.etf.com/sections/index-inve ... wg0QWBnTtt
The idea behind Betting Against Beta is that the security market line specified by the CAPM is flatter and much less steep than predicted by theory. The consequence is that while high beta stocks do indeed have higher returns, their risk adjusted return is lower than low beta stocks. (Some data go further to imply that low beta stocks have higher risk-adjusted returns AND higher returns in an absolute sense, but that's likely regime dependent.)
It is sensible that the security market line might be flatter than expected because of funding and leverage constraints. Investors want higher returns but they have limited access/willingness to use leverage to get those returns. As a result, they overweight high beta stocks (whose prices get bid up), and underweight low beta stocks.
The folks at AQR consider Betting Against Beta to be a legit factor while others such as Swedroe consider it to be superseded by existing factors.
Thoughts? Does anyone here employ BAB? Why or why not? Do you think it's a legit factor?
Some papers:
https://www.aqr.com/Insights/Research/J ... ainst-Beta
http://pages.stern.nyu.edu/~lpederse/pa ... stBeta.pdf
https://www.etf.com/sections/index-inve ... wg0QWBnTtt
