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Betting Against Beta

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  • Andrea Frazzini
  • Lasse H. Pedersen

Abstract

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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16601.

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Date of creation: Dec 2010
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Publication status: 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.
Handle: RePEc:nbr:nberwo:16601

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Cited by:
  1. Blitz, David & Pang, Juan & van Vliet, Pim, 2013. "The volatility effect in emerging markets," Emerging Markets Review, Elsevier, vol. 16(C), pages 31-45.
  2. DiTraglia, Francis J. & Gerlach, Jeffrey R., 2013. "Portfolio selection: An extreme value approach," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 305-323.
  3. Huffman, Stephen P. & Moll, Cliff R., 2013. "An examination of the relation between asymmetric risk measures, prior returns and expected daily stock returns," Review of Financial Economics, Elsevier, vol. 22(1), pages 8-19.
  4. Jakub W. Jurek & Erik Stafford, 2011. "The Cost of Capital for Alternative Investments," Harvard Business School Working Papers 12-013, Harvard Business School.
  5. Leonid Kogan & Mary Tian, 2012. "Firm characteristics and empirical factor models: a data-mining experiment," International Finance Discussion Papers 1070, Board of Governors of the Federal Reserve System (U.S.).
  6. John H. Cochrane, 2011. "Discount Rates," NBER Working Papers 16972, National Bureau of Economic Research, Inc.
  7. John Geanakoplos & Lasse Heje Pedersen, 2012. "Monitoring Leverage," NBER Chapters, in: Risk Topography: Systemic Risk and Macro Modeling National Bureau of Economic Research, Inc.

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