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Beta-Arbitrage Strategies: When Do They Work, and Why?

Last Updated on 10 February, 2024 by Rejaul Karim

The paper “Beta-Arbitrage Strategies: When Do They Work, and Why?” by Tony Berrada, Reda Jürg Messikh, Gianluca Oderda, and Olivier V. Pictet explores a strategy that bets against beta, by going long in low beta stocks and short in high beta stocks, which tends to outperform the market.

The authors consider a market in which diversity is maintained, i.e. no single stock can dominate the entire market, and they show that beta-arbitrage strategies mechanically out-perform the market portfolio. The paper provides empirical support to their explanation on equity country indices, equity sectors, individual stocks, and stock portfolios.

Finally, the authors show how to construct optimal beta-arbitrage strategies that maximize the expected return relative to a given benchmark.

Abstract Of Paper

Contrary to what traditional asset pricing would imply, a strategy that bets against beta, by going long in low beta stocks and short in high beta stocks, tends to outperform the market. We consider a market in which diversity is maintained, i.e. no single stock can dominate the entire market, and we show that beta-arbitrage strategies mechanically out-perform the market portfolio. We provide empirical support to our explanation on equity country indices, equity sectors, individual stocks, and stock portfolios. Finally, we show how to construct optimal beta- arbitrage strategies that maximize the expected return relative to a given benchmark.

Original paper – Download PDF

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Author

Tony Berrada
University of Geneva – Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Reda Jürg Messikh
Pictet Asset Management SA

Gianluca Oderda
Ersel Asset Management SGR s.p.a.

Olivier V. Pictet
Pictet Asset Management

Conclusion

The paper “Beta-Arbitrage Strategies: When Do They Work, and Why?” by Tony Berrada, Reda Jürg Messikh, Gianluca Oderda, and Olivier V. Pictet concludes that a strategy that bets against beta, by going long in low beta stocks and short in high beta stocks, tends to outperform the market.

The authors consider a market in which diversity is maintained, i.e. no single stock can dominate the entire market, and they show that beta-arbitrage strategies mechanically out-perform the market portfolio.

The paper provides empirical support to their explanation on equity country indices, equity sectors, individual stocks, and stock portfolios. Finally, the authors show how to construct optimal beta-arbitrage strategies that maximize the expected return relative to a given benchmark.

Related Reading:

Time-Varying Leverage Demand and Predictability of Betting-Against-Beta

Beta-Arbitrage Strategies: When Do They Work, and Why?

FAQ

What is the main strategy explored in the paper “Beta-Arbitrage Strategies: When Do They Work, and Why?”?

The main strategy explored in the paper is a beta-arbitrage strategy that involves going long in low beta stocks and short in high beta stocks. This strategy is designed to bet against beta and tends to outperform the market, contrary to what traditional asset pricing would imply.

What market conditions or characteristics does the paper consider for the beta-arbitrage strategy to outperform the market portfolio?

The paper considers a market in which diversity is maintained, meaning that no single stock can dominate the entire market. Under such conditions, the authors demonstrate that beta-arbitrage strategies mechanically outperform the market portfolio.

Does the paper provide empirical support for its explanation of beta-arbitrage strategies?

Yes, the paper provides empirical support for its explanation on various levels, including equity country indices, equity sectors, individual stocks, and stock portfolios. The authors use empirical evidence to validate the effectiveness of beta-arbitrage strategies in outperforming the market.

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