Betting against beta

Andrea Frazzini and Lasse Pedersen

Journal of Financial Economics, 2014, vol. 111, issue 1, 1-25

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) 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.

Keywords: Asset prices; Leverage constraints; Margin requirements; Liquidity; Beta; CAPM (search for similar items in EconPapers)
JEL-codes: G01 G11 G12 G14 G15 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (531)

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Related works:
Working Paper: Betting Against Beta (2012)
Working Paper: Betting Against Beta (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:111:y:2014:i:1:p:1-25

DOI: 10.1016/j.jfineco.2013.10.005

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