Betting Against Beta - Case OMX Helsinki

Abstract

One of the most famous theories in finance is the Capital Asset Pricing Model – a theory which is shown not to hold in empirical tests. The failure of the model and the abnormal performance of low-beta assets relative to high-beta assets is widely documented. Defensive securities have had higher returns than aggressive securities historically, in different markets and even asset classes, as shown by many studies. The phenomenon is opposite to the prediction of the CAPM, which expects that higher systematic risk would be rewarded by higher returns. Some authors have named the phenomenon as “the greatest anomaly in finance”.

Why have low-beta and low-volatility securities been superior to their high-beta and high-volatility alternatives historically? Can this phenomenon reasonably be expected to persist in the future? Does betting-against-beta, a strategy that takes a long position in low-beta stocks and a short position in high-beta stocks, provide positive excess returns in the OMX Helsinki stock market? This paper attempts to answer this question by reviewing previous literature and performing an empirical analysis using monthly stock data from the Finnish stock market, ranging from December 2001 to December 2017. In the relatively small and remote stock market of Finland, low-beta equities seem to have particularly strong returns over the period of study. The betting-against-beta strategy also performs convincingly and has positive excess returns, but there are also some caveats regarding the feasibility to execute the strategy in the studied market.