Betting Against BETA: An Empirical Study on Eurozone Equities

Vasileios-Nikolaos Syrmas & Andromachi Bourdouvali

Student thesis: Master thesis


The Capital Asset Pricing Model was and continues to be one of the most important tools that predicts assets returns. Despite that, it has been documented time and again, that the model overestimates the returns of high beta assets while underestimates returns of low beta assets. Combining that with an empirically recorded high intercept or abnormal return for zero beta assets, the Security Market Line has been docu mented to be flatter than the model estimates it. In our Thesis, we used approximately 1,500,000 data observations in equities within Eurozone to empirically test signs of this irregularity. We constructed twelve betting against beta portfolios following the methodology of Frazzini & Pedersen (2014), that go long low beta assets and short high beta assets, as well as beta-sorted portfolios for ten Eurozone countries, Denmark and a general Euro Index (EuroStoxx 50). We examined the persistence of beta anomaly (Proposition 1) for the aforementioned instruments, evaluated the performance of BAB portfolios (Proposition 2) and inspected the effects that funding shocks may have upon them (Proposition 3). Our findings suggest that BAB portfolios exhibit a positive average monthly excess return. We find some firm signs of beta disequilibrium within the Eurozone however we did not find a significant relationship between possible funding shocks and BAB portfolio returns mostly due to the statistical insignificance of our coefficients. Our results suggest that beta anomaly is a phenomenon not constricted within a single market and that beta arbitrage strategies can be implemented upon equities by leverage unconstrained investors within the Eurozone with signinficant positive retruns.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2019
Number of pages90