Betting Against Beta

Andrea Frazzini, Lasse Heje Pedersen

Research output: Working paperResearch

Abstract

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) Since constrained investors bid up high-beta assets, high beta is associated with low alpha, as we find empirically for U.S. 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.
Original languageEnglish
Place of Publicationwww
PublisherSSRN: Social Science Research Network
Number of pages85
DOIs
Publication statusPublished - 2012
SeriesSwiss Finance Institute Research Paper Series
Number12-17

Cite this

Frazzini, A., & Heje Pedersen, L. (2012). Betting Against Beta. SSRN: Social Science Research Network. Swiss Finance Institute Research Paper Series, No. 12-17 https://doi.org/10.2139/ssrn.2049939