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The role of beta strategies in other asset pricing anomalies

Bostad, Mats Engedal; Kjellevold, Pål
Master thesis
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URI
http://hdl.handle.net/11250/2586729
Date
2018
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  • Master Thesis [4657]
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.

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