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Research Papers College of Management Mahidol University “Betting against beta model: Evidence from Thai Stock Market”

10 August 2016

The 2016 Capital Market Research Scholarship for Graduate Students

By

Nattapon Kaewthammachai, graduated within 1 year

Rodjanachai Kongsawadsak, graduated within 1 year

Supatchak Thammathorn, graduated within 1 year

Piyapas Tharavanij, Ph.D., CFA, FRM, research advisor

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Buffet’s Factor

Safe


Betting against Beta (BAB) ? A betting against beta (BAB) factor, which is • Long low-beta assets • Short high-beta assets Producing the significant positive risk-adjusted returns.

Andrea Frazzini, Lasse Heje Pedersen


SML U.S. stocks is too flat relative to the CAPM

Black, F., M.C. Jensen, and M. Scholes (1972), “The Capital Asset Pricing Model: Some Empirical Tests.” In Michael C. Jensen (ed.), Studies in the Theory of Capital.


Portfolio Selection with constraints

Recent empirical evidence from different markets suggests that the security market line is flatter than posited by CAPM.


Andrea Frazzini and Lasse Heje Pedersen

Frazzini and Pedersen (2014), • BAB factor earns significant returns using data from 20 international equity markets, treasury bond markets, credit markets, and futures markets. • Higher volatility earn relatively lower returns. • Portfolios of high-beta assets have lower alphas and Sharpe ratios than portfolios of low-beta assets.


Betting-Against-Beta factor

Long low-beta assets, levered to a beta of one. Short high-beta assets, de-levered to a beta of one.

A BAB factor is a market-neutral excess return on a zero-cost portfolio (like HML and SMB)

Example: BAB factor for Thai stocks • Long worth of low-beta stocks • Short worth of high-beta stocks, on average


Empirical Study

Andrea Frazzini, Lasse Heje Pedersen Reference: Frazzini, A., & Pederson, L. H. (2014). Betting Against Beta. Journal of Financial Economics, 111(1), 1-25.

(Low-beta) (High-beta)

Portfolio P1 P2 P3 P4 P5 P6 P7 P8 P9 P10 BAB

Excess return 0.99 0.90 0.92 0.98 1.04 1.12 1.07 1.07 1.03 1.02 0.71

Volatility 18.20 18.70 20.60 22.40 24.70 27.00 28.40 31.50 33.80 40.00 11.50

Sharpe ratio 0.65 0.58 0.54 0.52 0.50 0.50 0.45 0.41 0.37 0.31 0.75*Returns is in monthly percent.**Volatilities and Sharpe ratios are annualized.


Empirical Study (Continue)

Prof. Jayanth R. Varma's Reference: Agarwalla, S. K., Jacob, J., Varma, J. R., & Vasudevan, E. (2014). Betting Against Beta in the Indian Market. Working Paper. Finance. Indian Institute of Management, Ahmedabad. India.

(Low-beta) (High-beta)

Portfolio P1 P2 P3 P4 P5 P6 P7 P8 P9 P10 BAB

Excess return 0.31 0.56 0.85 0.79 0.11 0.42 0.13 -0.42 -0.44 -1.19 1.70

Volatility 30.73 24.62 28.36 28.76 29.40 33.63 30.01 35.91 35.81 45.77 23.79

Sharpe ratio 0.12 0.27 0.36 0.33 0.05 0.15 0.05 -0.14 -0.15 -0.31 0.86*Returns is in monthly percent.**Volatilities and Sharpe ratios are annualized.


Data Collection

• SET100 index, stock price and beta collected from SETSMART. • February, 2003 and February, 2012. • Market return (Rm) collected from SETSMART. • Risk-free-rates based on one-month yield to maturity of Treasury bill

from Thai Bond Market Association (TBMA) iBond data base.

How about Thailand ?


Execution How we measure the return on portfolio ?

31 Jan 20XX 1 Feb 20XX 28 Feb 20XX

All securities beta are Securities are weighted by the ranks beta and rebalanced every month.

Ranked beta in ascending order base.

Return for any securities is measured by percent change.


Execution (Continue)

Betting-Against-Beta Portfolio

SET 100

Low-Beta Portfolio

High-Beta Portfolio


AVG monthly excess return of testing portfolios (Unit : percent per month)

Market SMB HML WML BAB

1.13 -0.64 -2.79 0.62 0.78

1.62 -0.81 -2.44 -0.10 0.93

6.88 5.23 5.12 7.42 5.03

0.57 -0.43 -1.88 0.29 0.54

-30.49 -27.90 -23.07 -19.99 -13.83

19.43 17.52 12.24 43.61 15.59Max

Average

Median

SD

Sharpe Ratio

Min

Reference : SET100 index, stock price and beta collected from SETSMART (Feb 2003 to Feb 2012).


Thailand Economic in 2003 - 2011


Execution (Continue)

SET 100

P1 P2 P3 P4 P5

20% port BETA

Low-Beta High-Beta


Alpha result of testing portfolios

Alphas and Sharpe Ratio decline monotonically from the low-beta to high-beta portfolios but the result of Volatility is in contrast with others. *,**, *** show significant at 10%, 5% and 1% levels respectively. t-stat reported in brackets.


Gibbons-Ross-Shanken (GRS) statistic

*,**, *** show significant at 10%, 5% and 1% levels respectively. t-stat reported in brackets.

Stat CAPM Fama French Carhart BAB augmented 4 - factor

GRS F 4.55 2.41 2.27 2.34

P-Value 0.00 *** 0.02 ** 0.02 ** 0.02 **

This table reveals that p-values of all models are significant at five percent significant level except CAPM. Which means the null hypothesis is rejected, the intercepts are not jointly equal to zero.


Considering beta factor in Thailand

International and Thai mutual funds are considering beta factor to be one of stock selection criteria.

• Only equity mutual fund which performs more than 10 years. • Getting 4-5 stars rating from Morningstar Thailand. • Historical return in 5 year performance from Top 15 in Thailand. • We separate into Thai and International institute mutual funds.

Our methods of sample selection as follow;


Mutual Funds Portfolio Robust Regression

*,**, *** show significant at 10%, 5% and 1% levels respectively. t-stat reported in brackets.


New Investment alternative Smart Beta in Thailand

“changing the way that people think about investing”

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