Betting Against Beta

[Smith1776]

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The folks at AQR consider Betting Against Beta to be a legit factor while others such as Swedroe consider it to be superseded by existing factors.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

[Smith1776]

I do enjoy the sound of crickets!

[vnatale]

I do enjoy the sound of crickets!

I just heard on the MLB Network that today is Canada's Thanksgiving Day? I had never heard of such a thing. Are you celebrating? And, how long has Canada had it and what was its origination?

Vinny

[Smith1776]

I do enjoy the sound of crickets!

I just heard on the MLB Network that today is Canada's Thanksgiving Day? I had never heard of such a thing. Are you celebrating? And, how long has Canada had it and what was its origination?

Vinny

I believe it started in Canada in 1879. It's very similar in spirit to the American holiday, and for most practical intents and purposes it's basically the same thing but just a different day haha.