The booms and busts of beta arbitrage

Huang, Shiyang, Liu, Xin, Lou, Dong ORCID: 0000-0002-5623-4338 and Polk, Christopher ORCID: 0009-0008-0133-6709 (2023) The booms and busts of beta arbitrage. Management Science. ISSN 0025-1909

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Abstract

Low-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 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 contrast, when arbitrage activity is high, prices overshoot and then revert in the long run. We document a novel positive-feedback channel operating through firm leverage that facilitates these boom-and-bust cycles.

Item Type:	Article
Additional Information:	© 2023 INFORMS
Divisions:	Finance
Subjects:	H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G10 - General
Date Deposited:	20 Nov 2023 17:18
Last Modified:	18 Nov 2024 21:24
URI:	http://eprints.lse.ac.uk/id/eprint/120807

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