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Type	Bachelor's Thesis
Scope	Discipline-based scholarship
Title	Betting against Beta - Evidence from the Swiss Stock and Bond Market
Organization Unit	Financial Economics (Thorsten Hens)
Authors	Mathias Ruoss
Supervisors	Thorsten Hens Regina Hammerschmid
Language	English
Institution	University of Zurich
Faculty	Faculty of Business, Economics and Informatics
Number of Pages	38
Date	2018
Zusammenfassung	One of the most profound anomalies in financial economics is that low-beta assets seem to generate higher risk-adjusted returns than high-beta assets, which implies that the security market line is flatter than predicted by the capital asset pricing model (CAPM). In a recent paper, Frazzini and Pedersen (2014) are able to capture this low-beta anomaly in betting against beta (BAB) factors across di˙erent assets and on a global level. They extend the theory of Black (1972) and argue that because leverage constrained investors "bid up" high-beta assets to reach their desired level of expected return, the security market line flattens relative to the CAPM. In particular, they find evidence for a relation between the TED spread as a funding liquidity factor and the return of the BAB factor, which indicates that leverage constraints could indeed help explain the low-beta anomaly. Frazzini and Pedersen (2014) even report a significant BAB factor in the Swiss stock market as part of their international evidence. However, they do not pay as much attention to these individual BAB factors in the non-U.S. stock markets. Moreover, they do not analyze inter- national non-government bonds. This thesis extends the work of Frazzini and Pedersen (2014) by examining whether the low-beta anomaly can be substantiated in the Swiss stock market and whether the low-beta anomaly also exists in the Swiss bond market. Similar to Frazzini and Pedersen (2014), self-financing zero-beta BAB portfolios are constructed consisting of stocks from the Swiss Market Index (SMI) and domestic non-government bonds from the Swiss Bond Index (SBI), respectively. These portfolios, also called BAB factors, are then tested against the CAPM to see whether they generate a statistically significant alpha. Based on the existing evidence, the hypothesis is that the BAB factor also appears in the SMI and SBI. Additionally, provided that a BAB factor and therefore evidence for the low-beta anomaly can be found, this thesis also addresses whether it can be explained by a funding liquidity factor and thus possible leverage constraints. In particular, a Swiss TED spread, which should measure funding conditions, is constructed and tested as an explanatory variable for the BAB factor in the respective market. In order to examine whether the low-beta anomaly exists in the SMI, daily price data adjusted for stock splits and dividends are extracted from Thomson Reuters Datastream and the survivorship bias-free SMI is used as the stock sample. At the end of each calendar month, the stocks are ranked by the size of their estimated beta in ascending order. The bottom 5 stocks build the low-beta portfolio, while the top 5 stocks build the high-beta portfolio. The zero-beta BAB factor is then constructed by going long the leveraged low-beta portfolio and going short the deleveraged high-beta portfolio. Both portfolios are rebalanced every month while no transaction costs or taxes are assumed. Excess returns of the BAB factor are analyzed by performance evaluation and regression analysis. Specifically, the monthly excess returns of the BAB factor over the period from May 1998 to December 2017 are regressed on the monthly excess returns of the SMI to test whether the BAB factor exists and generates a CAPM alpha. Furthermore, given statistical evidence that it exists, the return of the BAB factor is regressed on the Swiss TED spread as the funding liquidity factor to answer the question whether leverage constraints can explain the appearance of the low-beta anomaly. For the analysis of the SBI, a fixed sample of 31 domestic non-government bonds is selected and the corresponding SBI domestic non-government AAA-BBB is chosen as the market portfolio. The methodology for creating the zero-beta BAB portfolio is the same as for stocks, except that the estimation period for beta is shorter due to limited historical price data. The resulting monthly excess returns of the BAB factor over the period from January 2012 to March 2018 are regressed on the monthly excess returns of the SBI domestic non-government AAA-BBB to test whether the BAB factor exists in the Swiss bond market. Likewise, given statistical evidence that it exists, the return of the BAB factor is regressed on the Swiss TED spread.
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