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Conference Paper: The booms and busts of beta arbitrage

TitleThe booms and busts of beta arbitrage
Authors
Issue Date2016
Citation
The 5th Luxembourg Asset Management Summit, University of Luxembourg, Luxembourg, 9-11 October 2016. How to Cite?
AbstractLow-beta stocks deliver high average returns and low risk relative to high-beta stocks, an opportunity for professional investors to “arbitrage” away. We argue that beta arbitrage activity instead generates booms and busts in the strategy’s abnormal trading profits. In times of low arbitrage activity, the beta-arbitrage strategy exhibits delayed correction, taking up to three years for abnormal returns to be realized. In stark contrast, when activity is high, prices overshoot as short-run abnormal returns are much larger and then revert in the long run. We document a novel positive-feedback channel operating through firm-level leverage that facilitates these boom and bust cycles. These cyclical patterns also show up in hedge fund exposures to beta arbitrage, particularly exposures of smaller and thus more nimble funds, and can be linked to the past performance of the strategy.
Persistent Identifierhttp://hdl.handle.net/10722/233179

 

DC FieldValueLanguage
dc.contributor.authorHuang, S-
dc.contributor.authorLou, D-
dc.contributor.authorPolk, C-
dc.date.accessioned2016-09-20T05:35:06Z-
dc.date.available2016-09-20T05:35:06Z-
dc.date.issued2016-
dc.identifier.citationThe 5th Luxembourg Asset Management Summit, University of Luxembourg, Luxembourg, 9-11 October 2016.-
dc.identifier.urihttp://hdl.handle.net/10722/233179-
dc.description.abstractLow-beta stocks deliver high average returns and low risk relative to high-beta stocks, an opportunity for professional investors to “arbitrage” away. We argue that beta arbitrage activity instead generates booms and busts in the strategy’s abnormal trading profits. In times of low arbitrage activity, the beta-arbitrage strategy exhibits delayed correction, taking up to three years for abnormal returns to be realized. In stark contrast, when activity is high, prices overshoot as short-run abnormal returns are much larger and then revert in the long run. We document a novel positive-feedback channel operating through firm-level leverage that facilitates these boom and bust cycles. These cyclical patterns also show up in hedge fund exposures to beta arbitrage, particularly exposures of smaller and thus more nimble funds, and can be linked to the past performance of the strategy.-
dc.languageeng-
dc.relation.ispartofLuxembourg Asset Management Summit-
dc.titleThe booms and busts of beta arbitrage-
dc.typeConference_Paper-
dc.identifier.emailHuang, S: huangsy@hku.hk-
dc.identifier.authorityHuang, S=rp02052-
dc.identifier.hkuros263280-

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