An empirical examination of beta anomaly in India

Abstract

This paper investigates the presence of beta anomaly in the Indian market and tries to explore the reasons behind its existence. The beta anomaly does exist in India, but the negative relationship between beta and alpha is not because of the positive relationship between beta and idiosyncratic volatility (IVOL) and negative between IVOL and alpha. Further, on the basis of raw returns, the betting against beta (BAB) premium is very small in comparison with size and value premiums. Size effect is the strongest with a difference of 2.7% per month between small and big stock returns. On risk adjusted basis (CAPM), BAB premium is less than one-fourth of the size premium. But, market, size and value factors alone are not able to explain the variation in returns of low beta stocks. The introduction of the BAB factor in the Fama-French 3 factor model makes the alpha zero. In sum, the presence of BAB effect is observed in the Indian market though it is very small in respect to the size effect. Transaction costs may easily nullify the BAB premium.