Playing it Safe : An inquiry into the beta anomaly in the Nordic markets

Abstract

Extensive research indicates the existence of a beta anomaly across international markets and various asset classes. However, the mechanisms driving the anomaly and the feasibility of profitably exploiting it have been heavily debated. This thesis provides compelling evidence of the existence of a beta anomaly in the Nordic markets, with the results being robust to controlling for the size, value and momentum factors. Furthermore, our findings from implementing Frazzini and Pedersen’s (2014) Betting against beta strategy among larger companies indicate that the anomaly can be profitably exploited. By analyzing the relation between correlation and return, we investigate whether systematic risk can be identified as a driver of the anomaly. However, we do not find any conclusive evidence supporting this. While a strategy that bets against correlation yields positive Fama-French three-factor alpha, these results are not robust to controlling for momentum. This pattern persists across all versions of the strategies we implement in our study. In summary, despite indications of an exploitable beta anomaly, conclusive evidence of a systematic component behind it remains elusive.