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.