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G. DeSimone, A. Gupta, A. Rotach & O. Shih: The Implied Bet Against Beta (IBAB) Factor: A New Frontier for Low-Volatility Investing

May 1, 2023

In this research, we introduce a new factor, IBAB, which utilizes implied betas to construct a long-short portfolio of leveraged low-beta and short high-beta securities. Our results show that in the universe of S&P 500 constituents, IBAB outperforms the traditional BAB factor, with an annualized return of 5.3% compared to BAB’s -3.0%. Moreover, IBAB delivers a positive FF5 alpha of 2.5% while BAB exhibits a negative alpha of -6.0%. We further investigate the economic drivers behind the performance difference between IBAB and BAB and find that the implied correlation component of IBAB is the main driver of its superior performance.

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