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Betting Against Beta

Author

Listed:
  • Andrea Frazzini

    (AQR Capital Management, LLC)

  • Lasse Heje Pedersen

    (AQR Capital Management, LLC, Copenhagen Business School, New York University (NYU), and Centre for Economic Policy Research (CEPR))

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) Since constrained investors bid up high-beta assets, high beta is associated with low alpha, as we find empirically for U.S. 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.

Suggested Citation

  • Andrea Frazzini & Lasse Heje Pedersen, 2012. "Betting Against Beta," Swiss Finance Institute Research Paper Series 12-17, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1217
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    File URL: http://ssrn.com/abstract=2049939
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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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