Low-beta investment strategies
- Publisher: Centre for Financial Research Cologne
market timing | G11 | investment strategies | low-beta anomaly | G14 | G17
mesheuropmc: health care economics and organizations
This paper investigates investment strategies that exploit the low-beta anomaly. Although the notion of buying low-beta stocks and selling high-beta stocks is natural, a choice is necessary with respect to the relative weighting of high-beta stocks and low-beta stocks in the investment portfolio. Our empirical results for US large-cap stocks show that this choice is very important for the risk-return characteristics of the resulting portfolios and their sensitivities to common risk factors. We also show that investment strategies based on betas have a natural-hedge component and a market-timing component due to the stochastic variation of betas. We construct indicators to exploit the market-timing component and show that they have substantial predictive power for future market returns. Corresponding market-timing strategies deliver large positive excess returns and high Sharpe ratios.