Betting Against Beta: Fiction or Reality?

The standard CAPM model proposed by Sharp and Lintner between 1964-1965 implies that the additional systematic risk of stocks measured by beta coefficient is rewarded in proportion to the market risk premium. As numerous empirical studies show, this model does not always give correct predictions of future returns, as a result of which a number of market anomalies were revealed. One of these anomalies is the low beta / volatility stock return anomaly, the essence of which can be described as follows: stocks with low beta / volatility generate higher returns on average relative to the returns predicted by pricing models, and stocks with high beta / volatility, on the contrary, bring lower returns in comparison with the CAPM, Fama-French models and their modifications. There are many studies dedicated to explaining the Low-beta anomalies, but the vast majority of them are focused on developed markets. In this work, we studied Low-beta anomaly in emerging markets (India) for the possibility of its explanation and intersection with other phenomena. It was found that Low-beta anomaly in the Indian stock market is not explained by factors that cause this anomaly in developed markets, namely, the unaccounted risk of co-skewness of stock returns with market returns, as well as the effect of lottery demand. Another result of the study is as follows: it was shown that the positive profitability of the BAB-strategy, which is based on the use of Low-beta anomalies, does not depend on investing in specific industries, i.e. it is determined by the choice of specific stocks, rather than industries, and therefore, the positive return on this strategy is not due to opening long positions on shares from low-risk industries (with low average beta) and short positions on shares from high-risk industries (with high industry beta).