Betting against beta in the Indian market

Abstract

Recent empirical evidence from diff erent markets suggests that the security market line is flatter than posited by CAPM. This flatness implies that a portfolio long in low-beta assets and short in high-beta assets would earn positive returns. Frazzini and Pedersen (2014) conceptualize a BAB factor that tracks such a portfolio. We fi nd that a similar BAB factor earns signi ficant positive returns in India. The returns on the BAB factor dominate the returns on the size, value and momentum factors. We also nd that stocks with higher volatility earn relatively lower returns. These findings indicate overweighting of riskier assets by leverage constrained investors in the Indian market.