Post by shantiacquilar on Jan 14, 2012 8:28:23 GMT 4
Beta-Arbitrage Strategies: When Do They Work, and Why?
Tony Berrada
University of Geneva; Swiss Finance Institute
Reda Jürg Messikh
Pictet Asset Management SA
Gianluca Oderda
Pictet Asset Management SA
Olivier V. Pictet
Pictet Asset Management
December 20, 2011
Swiss Finance Institute Research Paper No. 11-64
Abstract:
Contrary to what traditional asset pricing would imply, a strategy that bets against beta, i.e. long in low beta stocks and short in high beta stocks, tends to out-perform the market. This puzzling empirical fact can be explained through the concept of relative arbitrage. Considering a market in which diversity is maintained, i.e. no single stock can dominate the entire market, we show that beta-arbitrage strategies out-perform the market portfolio with unit probability in nite time. We use the theoretical decomposition of beta-arbitrage excess return to provide empirical support to our explanation on equity country indices, equity sectors and individual stocks. Finally we show how to construct optimal beta-arbitrage strategies that maximize the expected return relative to a given benchmark.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1976285_code623849.pdf?abstractid=1976285&mirid=1
Tony Berrada
University of Geneva; Swiss Finance Institute
Reda Jürg Messikh
Pictet Asset Management SA
Gianluca Oderda
Pictet Asset Management SA
Olivier V. Pictet
Pictet Asset Management
December 20, 2011
Swiss Finance Institute Research Paper No. 11-64
Abstract:
Contrary to what traditional asset pricing would imply, a strategy that bets against beta, i.e. long in low beta stocks and short in high beta stocks, tends to out-perform the market. This puzzling empirical fact can be explained through the concept of relative arbitrage. Considering a market in which diversity is maintained, i.e. no single stock can dominate the entire market, we show that beta-arbitrage strategies out-perform the market portfolio with unit probability in nite time. We use the theoretical decomposition of beta-arbitrage excess return to provide empirical support to our explanation on equity country indices, equity sectors and individual stocks. Finally we show how to construct optimal beta-arbitrage strategies that maximize the expected return relative to a given benchmark.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1976285_code623849.pdf?abstractid=1976285&mirid=1