Does It Pay to Bet Against Beta? On the Conditional Performance of the Beta Anomaly
92 Pages Posted: 23 Apr 2013 Last revised: 24 Jun 2015
Date Written: June 22, 2015
Prior studies find that a strategy that buys high-beta stocks and sells low-beta stocks has a significantly negative unconditional Capital Asset Pricing Model (CAPM) alpha, such that it appears to pay to "bet against beta." We show, however, that the conditional beta for the high-minus-low beta portfolio covaries negatively with the equity premium and positively with market volatility. As a result, the unconditional alpha is a downward biased estimate of the true alpha. We model the conditional market risk for beta-sorted portfolios using instrumental variables methods and find that the conditional CAPM resolves the beta anomaly.
Keywords: Conditional CAPM, Beta Anomaly, Beta-Return Relation
JEL Classification: G10, G12
Suggested Citation: Suggested Citation