Betting Against Beta or Demand for Lottery
Turan G. Bali
Georgetown University - Robert Emmett McDonough School of Business
New York University (NYU) - Leonard N. Stern School of Business
University of Nebraska - Lincoln
Fordham University - School of Business
July 1, 2014
Georgetown McDonough School of Business Research Paper No. 2408146
Frazzini and Pedersen (2014) document that a betting against beta strategy that takes long positions in low-beta stocks and short positions in high-beta stocks generates a large abnormal return of 6.6% per year and they attribute this phenomenon to funding liquidity risk. We demonstrate that price pressure driven by demand for lottery-like stocks, not funding liquidity risk, generates the betting against beta phenomenon. Portfolio and regression analyses show that, after controlling for lottery demand, the betting against beta phenomenon disappears, while other variables, including measures of funding liquidity risk, fail to explain the effect. Furthermore, the betting against beta phenomenon only exists when the price impact of lottery demand falls disproportionately on high-beta stocks. Finally, factor models that include our lottery-demand factor explain the abnormal returns of the betting against beta portfolio as well as the betting against beta factor generated by Frazzini and Pedersen (2014). We conclude that the betting against beta phenomenon is a manifestation of demand for lottery-like stocks.
Number of Pages in PDF File: 76
Keywords: Beta, Stock Returns, Lottery Demand, Funding Liquidityworking papers series
Date posted: March 13, 2014 ; Last revised: July 12, 2014
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