Betting Against Beta: And the Unintended Effects of Academic Liteature

Anders Michelsen, Gustav Larsen & Toke K. Larsen

Student thesis: Master thesis


The main purpose of this master thesis is to conduct an analysis on how the magnitude of the Betting Against Beta (BAB) factor has changed over time mainly measured on the market, size, value, and momentum effects. The analysis is formed on the basis of a derivation and presentation of the Betting Against Beta model where proposition 1, 2 and 3 are all reviewed and proved. To conduct our analysis we utilize data from professor Kenneth R. French’s website, and reconstruct the BAB factor. The data consists of industry portfolios instead of individual assets. Therefore, in our reconstruction process we evaluate parameter values and adjust accordingly. Empirically we find that high-beta portfolios have a lower alpha and Sharpe ratio than low-beta portfolios. Furthermore, we find that the empirical security market line is flatter than assumed in the Capital Asset Pricing Model (CAPM) theory by William F. Sharpe (1964). These empirical findings are consistent with the results found by Frazzini and Pedersen (2013). In addition, we show how this deviation from standard CAPM theory can be captured using the BAB factor. We find evidence for a significant positive change to the BAB factor after the publication of the three-factor model by Fama and French (1993). This change could also be attributed to a delay in the widespread application of the CAPM. The publication of Sharpe’s CAPM article and Betting Against Beta by Frazzini and Pedersen (2013) had no immediate statistically significant impact on the BAB factor. However, we observe trends that are in line with our hypotheses.

EducationsMSc in Business Administration and Mathematical Business Economics, (Graduate Programme) Final Thesis
Publication date2021
Number of pages103