Does It Pay to Bet Against Beta? On the Conditional Performance of the Beta Anomaly

Scott H Cederburg, Michael S. O'Doherty

Research output: Contribution to journalArticlepeer-review

16 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)737-774
Number of pages38
JournalJournal of Finance
Volume71
Issue number2
DOIs
StatePublished - Apr 1 2016

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

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