Does Pakistan Stock Exchange Pay to Bet Against the Beta?

Authors

  • Hassan Raza SZABIST, Islamabad
  • Arshad Hassan Capital University of Science Technology, Islamabad
  • Faid Gul National University of Modern Languages, Islamabad

Abstract

Beta anomaly is regarded as one of the most puzzling phenomena in the history of finance as it negates the fundamental notion that a higher return can only be earned after taking more risk. This study conducts inquiries into the presence of the low beta anomaly in Pakistan Stock Exchange (PSX) after controlling for size and value, through the construction of an arbitrage portfolio by taking a long and short position on beta-sorted stocks. For this purpose, the study uses monthly data of all those stocks listed on PSX having data range from June 2001 to June 2017. The Fama-Macbeth methodology is used to derive the risk and returns relation by estimating beta on a 36-months rolling window. Initial testing of CAPM indicates a positive and significant relation between systematic risk and return. Further results reveal the presence of the low beta anomaly, as the lowest beta-sorted portfolio earns high average returns than the highest beta-sorted portfolio. The difference between this low-high beta-sorted average return is 6.4% in annualized terms. The performance of beta sorted portfolios is also compared on the Sharpe ratio. Results reveal that a low beta-sorted portfolio reports a higher Sharpe ratio as compared with a high beta-sorted portfolio. The arbitrage portfolio (short on highly beta portfolio and long on small beta portfolio) reports a significant difference in returns as compared with other portfolios. Arbitrage portfolio is also sub-divided based on the holding period yield and reveals that it out-performed other portfolios during the reported period of 2003 to 2009, however, in other time periods the results are not significantly different. Based on these results, investors may devise their portfolio strategies by considering this anomaly until risk-return relation reverts to equilibrium.

Author Biographies

Hassan Raza, SZABIST, Islamabad

Department of Management Sciences,

Assistant Professor

Arshad Hassan, Capital University of Science Technology, Islamabad

Department of Management Sciences

Professor

Faid Gul, National University of Modern Languages, Islamabad

Department of Management Sciences

Associate Professor

References

Ang, A., Hodrick, R. J., Xing, Y., & Zhang, X. (2006). The cross-section of volatility and expected returns. Journal of Finance, 61(1), 259-299. https://doi.org/10.1111/j.1540-6261.2006.00836.x

Ang, A., Hodrick, R. J., Xing, Y., & Zhang, X. (2009). High idiosyncratic volatility and low returns: International and further U.S. evidence. Journal of Financial Economics, 91(1), 1-23. https://doi.org/10.1016/j.jfineco.2007.12.005

Asness, C. S., Frazzini, A., & Pedersen, L. H. (2014). Low-risk investing without industry bets. Financial Analysts Journal, 70(4), 24-41. https://doi.org/10.2469/faj.v70.n4.1

Baker, M., Bradley, B., & Wurgler, J. (2011). Benchmarks as limits to arbitrage: Understanding the low-volatility anomaly. Financial Analysts Journal, 67(1), 40-54. https://doi.org/10.2469/faj.v67.n1.4

Baker, N. L., & Haugen, R. A. (2012). Low Risk Stocks Outperform within All Observable Markets of the World. Available at SSRN 2055431, (2055431), 1-22. https://doi.org/10.2139/ssrn.2055431

Barberis, N., & Huang, M. (2008). Stocks as lotteries: The implications of probability weighting for security prices. American Economic Review, 98(5), 2066-2100. https://doi.org/10.1257/aer.98.5.2066

Black, F. (1972). Beta and Return. The Journal of Portfolio Management, 20(1), 74-84. https://doi.org/10.3905/jpm.1993.409462

Black, F., Jensen, M. C., & Scholes, M. (1972). The Capital Asset Pricing Model: Some Empirical Tests. In Studies in the Theory of Capital Markets (Vol. 81). https://doi.org/10.2139/ssrn.908569

Blitz, D., Pang, J., & van Vliet, P. (2013). The volatility effect in emerging markets. Emerging Markets Review, 16(1), 31-45. https://doi.org/10.1016/j.ememar.2013.02.004

Buchner, A., & Wagner, N. (2016). The betting against beta anomaly: Fact or fiction? Finance Research Letters, 16, 283-289. https://doi.org/10.1016/j.frl.2015.12.010

Cederburg, S., & O’Doherty, M. S. (2016). Does It Pay to Bet Against Beta? On the Conditional Performance of the Beta Anomaly. Journal of Finance, 71(2), 737-774. https://doi.org/10.1111/jofi.12383

Chow, T., Hsu, J. C., Kuo, L., & Li, F. (2014). A Study of Low-Volatility Portfolio Construction Methods. The Journal of Portfolio Management, 40(4), 89-105. https://doi.org/10.3905/jpm.2014.40.4.089

Estrada, J. (2002). Systematic risk in emerging markets: The D-CAPM. Emerging Markets Review, 3(4), 365-379. https://doi.org/10.1016/S1566-0141(02)00042-0

Fama, E. F., & French, K. R. (1992). The Cross-Section of Expected Stock Returns. The Journal of Finance, 47(2), 427-465. https://doi.org/10.1111/j.1540-6261.1992.tb04398.x

Fama, E. F., & Macbeth, J. D. (1973). Risk, Return, and Equilibrium : Empirical Tests. The University of Chicago Press Journals, 81(3), 607-636.

Frazzini, A., & Pedersen, L. H. (2014). Betting against beta. Journal of Financial Economics, 111(1), 1-25. https://doi.org/10.1016/j.jfineco.2013.10.005

Haugen, R. A., & Heins, A. J. (1975). Risk and the Rate of Return on Financial Assets: Some Old Wine in New Bottles. The Journal of Financial and Quantitative Analysis, 10(5), 775-784. https://doi.org/10.2307/2330270

Iqbal, J. (2012). Stock market in Pakistan: An overview. Journal of Emerging Market Finance, 11(1), 61-91. https://doi.org/10.1177/097265271101100103

Joshipura & Joshipura, M. (2017). Beta Anomaly and Comparative Analysis of Beta Arbitrage Strategies. NMIS Management Review, XXXIII(January 2017), 57-72.

Joshipura, M., & Joshipura, N. (2015). Risk Anomaly: A Review of Literature. Asian Journal of Finance & Accounting, 7(2), 138-151. https://doi.org/10.5296/ajfa.v7i2.8262

Kochard, L., & Sullivan, R. N. (2014). Low-Volatility Cycles : The Influence of Valuation and Momentum on Low- Volatility Portfolios Low-Volatility Cycles : The Influence of Valuation and Momentum on Low- Volatility Portfolios. Financial Analysts Journal, 71(3), 47-60. https://doi.org/citeulike-article-id:13170803

Li, X., Sullivan, R. N., & Garcia-Feijóo, L. (2014). The limits to arbitrage and the low-volatility anomaly. Financial Analysts Journal, 70(1), 52-63. https://doi.org/10.2469/faj.v70.n1.3

Lintner, J. (1965). The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets. The Review of Economics and Statistics, 47(1), 13-37. https://doi.org/10.2307/1924119

Mossin, J. (1966). Equilibrium in a Capital Asset Market. Econometrica, 34(4), 768-783. https://doi.org/10.2307/1910098

Perold, A. F. (2004). The Capital Asset Pricing Model. Journal of Economic Perspectives, 18(3), 3-24. https://doi.org/10.1257/0895330042162340

Sharpe, W. F. (1964). Capital asset prices: A theory of Market Equilibrium under Conditions of Risk. The Journal of Finance, 19(3), 425-442. https://doi.org/10.2307/2329297

Downloads

Published

19.06.2020

How to Cite

Raza, H., Hassan, A., & Gul, F. (2020). Does Pakistan Stock Exchange Pay to Bet Against the Beta?. CITY UNIVERSITY RESEARCH JOURNAL, 10(1). Retrieved from https://cusitjournals.com/index.php/CURJ/article/view/354

Issue

Section

Articles