Weekly Research Insights - Using VIX to Time High-Beta Stocks

When Beta Timing Works

Hi there, and welcome to a new edition of Research Insights.

Before we turn to today’s topic, a quick note: There will be no Thursday post next week, as I’ll be away on holiday with my family. The regular schedule will resume the following week.

This week, I explore timing of the beta premium, the return difference between high- and low-beta stocks. It’s well known that low-beta stocks tend to deliver higher Sharpe ratios than high-beta stocks over the long run. Back in December, I discussed the low-beta/vol anomaly and backtested several low-volatility signals. In that post, I shared a figure showing the Sharpe ratios of decile portfolios formed by sorting stocks monthly on their past-year volatility (measured using daily returns). I then computed each portfolio’s market beta and plotted Sharpe ratios against beta:

Contrary to traditional finance theory, the figure illustrates that portfolios of low-risk stocks achieve significantly higher Sharpe ratios than those of high-risk stocks. This pattern has been documented extensively in the literature.

But today’s topic pushes that insight further. Recent academic research shows that the beta premium isn’t static. There are periods when the high-minus-low beta return flips sign, meaning it pays off to overweight high-beta stocks.

Below, I walk through the new findings and share my empirical tests of this idea.