The Unintended Impact of Academic Research on Asset Returns: The CAPM Alpha
I sort stocks based on realized alphas estimated from the CAPM, Carhart (1997) and Fama French Five Factor (FF5, 2015) models and find that realized alphas are negatively related with future stock returns, future alpha, and Sharpe Ratios. Thus, I construct a Betting Against Alpha (BAA) factor that buys a portfolio of low alpha stocks and sells a portfolio of high alpha stocks. Using rank estimation methods, I show that the BAA factor spans a dimension of stock returns different than Frazzini and Pedersen's (2014) Betting Against Beta (BAB) factor. Additionally, the BAA factor captures information about the cross section of stock returns missed by the CAPM, Carhart, and FF5 models. The performance of the BAA factor further improves if the low alpha portfolio is calculated from low beta stocks and the high alpha portfolio from high beta stocks. I call this factor Betting Against Alpha and Beta (BAAB) I discuss several reasons that support the existence of this counter intuitive low alpha anomaly.