The Beta Anomaly in Recessions: Revisiting Beta's role in the Beta Anomaly

Abstract: In this thesis, we extend upon existing research on the beta anomaly by investigating beta's role in the anomaly. This is done by studying the anomaly during recessions, where beta-driving variables such as leverage constraints likely are affected. Our empirical results are presented as portfolios based on a sorting of beta and mispricing and we explore explanatory variables such as beta by eliminating portions of the variable. Our results show that beta indeed plays a large role in explaining the beta anomaly and that low-beta stocks as well as high-beta stocks perform above average during recessions. A study by Frazzini, Pedersen (2014) of leverage constraints may be able to explain our findings, but further research is necessary to draw certain conclusions.