Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Betting Against Beta in the Indian Market

My colleagues, Prof Sobhesh Kumar Agarwalla, Prof. Joshy Jacob, Mr. Ellapulli Vasudevan and I have written a working paper on “Betting Against Beta in the Indian Market” (also available at SSRN)

Recent empirical evidence from different markets suggests that the security market line is flatter than posited by CAPM and a market neutral portfolio long in low-beta assets and short in high-beta assets earns positive returns. Frazzini and Pedersen (2014) conceptualize a Betting against Beta (BAB) factor that tracks such a portfolio. They find that the BAB factor earns significant returns using data from 20 international equity markets, treasury bond markets, credit markets, and futures markets. We find that a similar BAB factor earns significant positive returns in the Indian equity market. The returns on the BAB factor dominate the returns on the size, value and momentum factors. We also find that stocks with higher volatility earn relatively lower returns. These findings are consistent with the Frazzini and Pedersen model in which many investors do not have access to leverage and therefore overweight the high-beta assets to achieve their target return.

Like our earlier work on the Fama-French and momentum factor returns in India (see this blog post), this study also contributes to an understanding of the cross section of equity returns in India. Incidentally, the long promised update of the Fama-French and momentum factor returns is coming soon. We wanted to put the data update process on a more sound foundation and that has taken time. While the update has been delayed, we expect it to be more reliable as a result.


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