Abstract

http://ssrn.com/abstract=2408146
 


 



Betting Against Beta or Demand for Lottery


Turan G. Bali


Georgetown University - Robert Emmett McDonough School of Business

Stephen Brown


New York University (NYU) - Leonard N. Stern School of Business

Scott Murray


University of Nebraska - Lincoln

Yi Tang


Fordham University - School of Business

August 1, 2014

Georgetown McDonough School of Business Research Paper No. 2408146

Abstract:     
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 find strong confirmation of their results on U.S. equity data, but provide evidence of an alternative explanation. Portfolio and regression analyses show that the betting against beta phenomenon disappears after controlling for the lottery characteristics of the stocks in our sample, while other measures of firm characteristics and 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. We also find that this lottery characteristic aggregates at the portfolio level and therefore cannot be diversified away. 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.

Number of Pages in PDF File: 78

Keywords: Beta, Stock Returns, Lottery Demand, Funding Liquidity

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Date posted: March 13, 2014 ; Last revised: September 2, 2014

Suggested Citation

Bali, Turan G. and Brown, Stephen and Murray, Scott and Tang, Yi, Betting Against Beta or Demand for Lottery (August 1, 2014). Georgetown McDonough School of Business Research Paper No. 2408146. Available at SSRN: http://ssrn.com/abstract=2408146 or http://dx.doi.org/10.2139/ssrn.2408146

Contact Information

Turan G. Bali
Georgetown University - Robert Emmett McDonough School of Business ( email )
3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)
HOME PAGE: http://faculty.msb.edu/tgb27/index.html

Stephen Brown
New York University (NYU) - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States

Scott Murray (Contact Author)
University of Nebraska - Lincoln ( email )
Lincoln, NE 68588-0490
United States
402-472-2432 (Phone)
Yi Tang
Fordham University - School of Business ( email )
113 West 60th Street
Bronx, NY 10458
United States

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