Bear Beta Factor Investing Strategy

Paper linkhttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=4027995

This strategy uses CRSP stocks with fundamentals from Compustat and options data from OptionMetrics. Bear betas are estimated using past returns, and stocks are sorted into deciles. A zero-investment portfolio goes long low bear-beta stocks and shorts high bear-beta stocks, rebalanced monthly.

Traditional theory suggests high bear-beta stocks should earn higher returns during downturns. Instead, results show a negative beta–return relationship, explained by aggregate disagreement among investors. This anomaly persists and is not captured by standard factor models.