Abstract
The authors adopt an event study method and empirically investigate the performance of a beta momentum strategy (long in past winners of small beta and short in past losers of large beta) after extreme market movements in 20 countries. The researchers find that the beta momentum strategy yields material abnormal returns after controlling for return factors of size (SMB), book-to-market (HML) and momentum (UMD). The results are consistent for both extreme market UP days or DOWN days and regardless of whether the extreme market movements are identified by three percent or two percent cut-off points. In addition, the results based on the beta momentum strategy are more consistent than those of conventional momentum and betting against beta (BAB) strategies over different test windows from (0, +1) days to (0, +90). Finally, the abnormal returns based on momentum, BAB, and our beta momentum strategies are statistically insignificant for the Asian and Australian subsamples, whereas the results are significant for the European and North American samples.
Highlights
Whether beta is priced to the degree predicted by the standard capital asset pricing model (CAPM) and whether beta is dead or alive are hot debated and unsettled issues in recent years (Fama & French, 1992, 1995; Chan & Lakonishok, 1993; Berk et al, 1999; Roll & Ross, 1994; Campbell & Vuolteenaho, 2004), undoubtedly, beta is still an important factor in portfolio formation and trading strategies
Frazzini and Pedersen (2014) further find that a betting against beta (BAB) strategy, which is long in low beta assets and short in high beta assets, yields superior risk-adjusted returns in equity markets, and in other asset classes
We propose a new strategy – beta momentum strategy, which is buying small-beta stocks of past winners (SB-W) and selling large-beta stocks of past losers (LB-L) around extreme market movements
Summary
Whether beta is priced to the degree predicted by the standard capital asset pricing model (CAPM) and whether beta is dead or alive are hot debated and unsettled issues in recent years (Fama & French, 1992, 1995; Chan & Lakonishok, 1993; Berk et al, 1999; Roll & Ross, 1994; Campbell & Vuolteenaho, 2004), undoubtedly, beta is still an important factor in portfolio formation and trading strategies. We propose a new strategy – beta momentum strategy, which is buying small-beta stocks of past winners (SB-W) and selling large-beta stocks of past losers (LB-L) around extreme market movements. The momentum strategy is based on the belief that investors underreact to information so that the past winners (losers) will continue to outperform (underperform) in the future The beta momentum yields a consistent CAR of 1.41% and 1.65% over the test window (0, +15) after extreme DOWN and UP days, respectively, and both numbers are significant at the either 0.05 or 0.01 levels.
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