articleJournal of Financial EconomicsOct 17, 2013HYBRID OA

Betting against beta

AFAndrea FrazziniLHLasse Heje Pedersen

Capital University · New York University · +3 more institutions

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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…

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Topics
Keywords
  • BETA (programming language)
  • Bond
  • Futures contract
  • Market liquidity
  • Equity (law)
  • Financial economics
  • Treasury
  • Leverage (statistics)
UN Sustainable Development Goals
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