Turning alphas into betas: arbitrage and endogenous risk

Thummim Cho

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Using data on asset pricing anomalies, I test the idea that the act of arbitrage turns “alphas” into “betas”: Assets with high initial abnormal returns attract more arbitrage and covary endogenously more with systematic factors that arbitrage capital is exposed to. This channel explains the exposures of 40 anomaly portfolios to aggregate funding liquidity shocks and arbitrageur wealth portfolio shocks. My results highlight that financial intermediaries that act as asset market arbitrageurs not only price assets given risks, but also actively shape these risks through their trades.

Keywords: endogenous risk; factor beta; financial intermediaries; arbitrage; asset pricing anomalies; Paul Woolley Centre at the LSE (search for similar items in EconPapers)
JEL-codes: G11 G12 G23 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2020-08-01
New Economics Papers: this item is included in nep-cwa, nep-fmk, nep-isf and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published in Journal of Financial Economics, 1, August, 2020, 137(2), pp. 550 - 570. ISSN: 0304-405X

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:102085

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