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BETA ANOMALY IN TURKISH EQUITY MARKET ( BETA ANOMALY IN TURKISH EQUITY MARKET )

Author : -Ümit Altay BARAN-- Cenk C. KARAHAN

Abstract

The Capital Asset Pricing Model (CAPM), the de-facto standard in asset pricing for over half a century, dictates that rational agents invest in portfolios with the highest excess return per unit of risk by maximizing Sharpe ratio. However, there are numerous empirically documented anomalies that are violating this basic premise of the CAPM. These anomalies yield opportunities for statistical arbitrage in the market. Beta anomaly is the empirical observation that high beta assets return lower risk-adjusted returns than low beta assets as documented in numerous markets, thus yielding a flatter security market line than the CAPM implies. Leverage constraints, margin requirements or behavioral biases are offered as explanation for the excessive demand for high beta assets. An investor can exploit this observed anomaly by constructing an appropriate portfolio. In this study, we investigate whether Beta anomaly is indeed present in Borsa Istanbul (BIST). By using the price information of the stocks quoted in BIST, we form test portfolios sorted through the ex-ante Betas of stocks. The evaluation of the results over 31 years of monthly data reveals that Beta anomaly is present in Borsa Istanbul, and sophisticated investors can arbitrage this anomaly to generate excess returns.

Keywords: Keywords: Asset pricing, Investments, Anomalies, CAPM


The Capital Asset Pricing Model (CAPM), the de-facto standard in asset pricing for over half a century, dictates that rational agents invest in portfolios with the highest excess return per unit of risk by maximizing Sharpe ratio. However, there are numerous empirically documented anomalies that are violating this basic premise of the CAPM. These anomalies yield opportunities for statistical arbitrage in the market. Beta anomaly is the empirical observation that high beta assets return lower risk-adjusted returns than low beta assets as documented in numerous markets, thus yielding a flatter security market line than the CAPM implies. Leverage constraints, margin requirements or behavioral biases are offered as explanation for the excessive demand for high beta assets. An investor can exploit this observed anomaly by constructing an appropriate portfolio. In this study, we investigate whether Beta anomaly is indeed present in Borsa Istanbul (BIST). By using the price information of the stocks quoted in BIST, we form test portfolios sorted through the ex-ante Betas of stocks. The evaluation of the results over 31 years of monthly data reveals that Beta anomaly is present in Borsa Istanbul, and sophisticated investors can arbitrage this anomaly to generate excess returns.

Keywords: Keywords: Asset pricing, Investments, Anomalies, CAPM