Betting Against Beta

By Andrea Frazzini, Lasse Heje Pedersen. 2010

1,903 citations recorded by the source corpus.

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.

Subfields: Accounting, Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/868936f9355798356684440391ecb940ea13e756

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Citations in the corpus

Digesting Anomalies: An Investment Approach (2015, background): “Following Frazzini and Pedersen (2014), we estimate β for firm i as: β̂i = ρ̂ σ̂i σ̂m , (A13) in which σ̂i and σ̂m are the estimated volatilities for stock i and the market, and ρ̂ is their correlation.”
Dissecting Characteristics Nonparametrically (2020, positive): “Related Literature The Capital Asset Pricing Model (CAPM) of Sharpe (1964), Lintner (1965), and Mossin (1966) predicts an asset’s beta with respect to the market portfolio is a sufficient statistic for the cross-section of expected returns.”
A Transaction-Cost Perspective on the Multitude of Firm Characteristics (2020, positive): “…finds using Fama-MacBeth regressions that 12 are jointly signifi- 5In addition to the 50 firm-specific characteristics, we consider also beta (i.e., the exposure of each stock to the market-return factor) because of its importance for investment management, as shown in Frazzini and Pedersen (2014).”
Risk Everywhere: Modeling and Managing Volatility (2018, positive): “A possible explanation for the superior performance of risk parity strategies is provided by Asness, Frazzini, and Pedersen (2012) and Frazzini and Pedersen (2013), who argue that many investors are leverage constrained and as such often overweight risky securities.”
Low‐Risk Anomalies? (2020, positive): “We estimate ex-ante CAPM betas exactly as described in Frazzini and Pedersen (2014). For security i, the beta estimate is given by”
An Intertemporal CAPM with Stochastic Volatility (2018, background): “The important implication is that our threebeta model with priced volatility risk helps to explain the well-known result that stocks with high past market betas have offered relatively little extra return in the past 50 years ( Fama and French, 1992; Frazzini and Pedersen, 2013 ).”
What Is the Expected Return on a Stock? (2019, positive): “Our estimation of conditional CAPM betas based on past returns follows Frazzini and Pedersen (2014), i.”
ESG controversies and controversial ESG: about silent saints and small sinners (2020, methodology): “As already published by previous studies such as Halbritter and Dorfleitner (2015), we confirm the recent observation, being that a market-weighted ESG strategy does not result in ongoing significant overperformance, so for this strategy, there is no clear out- or underperformance of best or worst p”
Value versus growth investing: Why do different investors have different styles? (2015, neutral): “If shared by a sufficiently large part of the population, such experiences could result in legacy effects that affect the relative demand for value versus growth stocks and thereby possibly the value premium, similar to the implications of Friedman and Schwartz (1963) and Cogley and Sargent (2008) f”