The role of beta strategies in other asset pricing anomalies
Abstract
This thesis is based on the findings of Liu (2018), and therefore considers long-short, zero
cost portfolios based on documented asset pricing anomalies. These include momentum,
composite equity issuance, return volatility, and idiosyncratic volatility. Consistent with the
observations in Liu (2018), we find that the relevant long-short portfolios embed significantly
negative realized betas and therefore load in the low-beta anomaly. Neutralization of this
exposure decreases the economic magnitude and statistical significance of their abnormal
returns. In order to demonstrate this, we follow the methodology of Liu (2018) and propose
a modification to one of the beta mitigation techniques. Also, we contribute with other
methods, documented in the existing literature, that are designed either to reduce the beta
imbalance or to account for the portfolios’ exposure to the beta anomaly. Furthermore,
we contribute by testing all methods of beta mitigation for alternative pre-formation beta
estimation techniques, in order to investigate if these a↵ect the explanatory power of the
beta anomaly. Consistent with the findings of Liu (2018), we find that the mitigation of
the inherent beta imbalance in the long-short anomaly portfolios either decreases or removes
these strategies’ abnormal returns. The magnitudes of these reductions vary by choice of
beta neutralization method and pre-formation beta estimation technique.