Betting Against Beta
Andrea Frazzini () and
No 16601, NBER Working Papers from National Bureau of Economic Research, Inc
We present a model in which some investors are prohibited from using leverage and other investors' leverage is limited by margin requirements. The former investors bid up high-beta assets while the latter agents trade to profit from this, but must de-lever when they hit their margin constraints. We test the model's predictions within U.S. equities, across 20 global equity markets, for Treasury bonds, corporate bonds, and futures. Consistent with the model, we find in each asset class that a betting-against-beta (BAB) factor which is long a leveraged portfolio of low-beta assets and short a portfolio of high-beta assets produces significant risk-adjusted returns. When funding constraints tighten, betas are compressed towards one, and the return of the BAB factor is low.
JEL-codes: E43 G1 G12 G14 (search for similar items in EconPapers)
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Published as “Betting Against Beta,” 2010 (with Andrea Frazzini) Journal of Financial Economics, forthcoming. Swiss Finance Institute Outstanding Paper Award, 2011. Roger F. Murray Prize, 2011. Featured in The Economist, the Financial Times.
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Journal Article: Betting against beta (2014)
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