Market neutrality and beta crashes

IF 2.1 2区经济学 Q2 BUSINESS, FINANCE

Journal of Empirical Finance Pub Date : 2025-01-01 DOI:10.1016/j.jempfin.2024.101577

Xia Xu

引用次数: 0

Abstract

Market neutrality is a key feature of Frazzini and Pedersen (2014)’s betting-against-beta (BAB) factor. However, we find that BAB fails to remain market neutral in practice, and the deviations from market neutrality often arrive in the shape of crashes. BAB resembles momentum in terms of option-like payoffs, exhibiting significant exposure to large market movements. Particularly, BAB effectuates negative market timing and negative volatility timing amid volatile markets, promoting BAB crashes. The concern of imperfect market neutrality is shared by a broad range of beta arbitrage strategies that are aimed at being market neutral. The strategy’s vulnerability to bull markets is not fundamentally explained by the liquidity and leverage rationale. Managing beta crashes significantly improves investment performance.

查看原文本刊更多论文

求助全文

约1分钟内获得全文求助全文

来源期刊

Journal of Empirical Finance Multiple-

CiteScore

3.40

自引率

3.80%

发文量

期刊介绍： The Journal of Empirical Finance is a financial economics journal whose aim is to publish high quality articles in empirical finance. Empirical finance is interpreted broadly to include any type of empirical work in financial economics, financial econometrics, and also theoretical work with clear empirical implications, even when there is no empirical analysis. The Journal welcomes articles in all fields of finance, such as asset pricing, corporate finance, financial econometrics, banking, international finance, microstructure, behavioural finance, etc. The Editorial Team is willing to take risks on innovative research, controversial papers, and unusual approaches. We are also particularly interested in work produced by young scholars. The composition of the editorial board reflects such goals.