Enhancing betting against beta with stochastic dominance

Kolokolova, Olga and Xu, Xia (2024) Enhancing betting against beta with stochastic dominance. Journal of Empirical Finance, 76: 101465. ISSN 0927-5398

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Abstract

The performance of the widely used betting-against-beta (BAB) investment strategy is improved by controlling for the stochastic dominance (SD) relation between individual stocks and the market portfolio. Dominating stocks, preferred by all risk-averse and prudent investors, are excluded from the short leg of the BAB strategy. Stocks that are dominated by the market are excluded from the long leg of the strategy. This prefiltering significantly enhances a wide range of performance and risk measures including abnormal returns relative to various factor models. The improvements are especially pronounced for the third-order SD, are robust to transaction costs and different market conditions.

Item Type:

Journal Article

Journal or Publication Title:

Journal of Empirical Finance

Uncontrolled Keywords:

Research Output Funding/no_not_funded

Subjects:

?? stochastic dominancemarket betabeta arbitragebetting against betano - not fundednofinanceeconomics and econometricsd81, g11, g15 ??

Departments:

Lancaster University Management School > Accounting & Finance

ID Code:

212457

Deposited By:

ep_importer_pure

Deposited On:

08 Jan 2024 10:45

Refereed?:

Yes

Published?:

Published

Last Modified:

19 Nov 2024 02:05

URI:

https://eprints.lancs.ac.uk/id/eprint/212457