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Journal of Financial Economics Vol. 111 No. 1 2014

Betting against beta

Andrea Frazzini1; Lasse Heje Pedersen2,3,1,4,5

1 Capital University · 2 New York University · 3 Centre for Economic Policy Research · 4 Copenhagen Business School · 5 National Bureau of Economic Research

open access

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.

DOI
10.1016/j.jfineco.2013.10.005
Volume
111
Issue
1
Pages
1-25
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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