Betting against Beta

Andrea Frazzini, Lasse Heje Pedersen

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Abstrakt

We present a model with leverage and margin constraints that vary across investors and time. We find evidence consistent with each of the model's five central predictions: (1) Because constrained investors bid up high-beta assets, high beta is associated with low alpha, as we find empirically for US equities, 20 international equity markets, Treasury bonds, corporate bonds, and futures. (2) A betting against beta (BAB) factor, which is long leveraged low-beta assets and short high-beta assets, produces significant positive risk-adjusted returns. (3) When funding constraints tighten, the return of the BAB factor is low. (4) Increased funding liquidity risk compresses betas toward one. (5) More constrained investors hold riskier assets.
OriginalsprogEngelsk
TidsskriftJournal of Financial Economics
Vol/bind111
Udgave nummer1
Sider (fra-til)1-25
ISSN0304-405X
DOI
StatusUdgivet - 2014

Emneord

  • Asset prices
  • Leverage constraints
  • Margin requirements
  • Liquidity
  • Beta
  • CAPM

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