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
August 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 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 Liquidityworking papers series
Date posted: March 13, 2014 ; Last revised: September 2, 2014
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