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 language | English (US) |
|---|---|
| Pages (from-to) | 737-774 |
| Number of pages | 38 |
| Journal | Journal of Finance |
| Volume | 71 |
| Issue number | 2 |
| DOIs | |
| State | Published - Apr 1 2016 |
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics