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Betting Against Beta

  • Andrea Frazzini
  • Lasse H. Pedersen

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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File URL: http://www.nber.org/papers/w16601.pdf
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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
Note: AP
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