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
J. Mack Robinson College of Business - Georgia State University
Fordham University - School of Business
August 1, 2015
Georgetown McDonough School of Business Research Paper No. 2408146
The low (high) abnormal returns of stocks with high (low) beta, dubbed the betting against beta phenomenon, is the most persistent anomaly in empirical asset pricing research. This paper demonstrates that investors' demand for lottery-like stocks generates the betting against beta effect. Portfolio and regression analyses show that the betting against beta phenomenon disappears after controlling for lottery demand. The betting against beta phenomenon only exists when the price impact of lottery demand falls disproportionately on high-beta stocks and is concentrated in stocks with low levels of institutional ownership, a finding consistent with the lottery demand explanation. Factor models that include our lottery demand factor explain the abnormal returns associated with betting against beta. Finally, after controlling for lottery demand, portfolio and regression analyses detect a security market line slope that is significantly positive and insignificantly different from the market risk premium.
Number of Pages in PDF File: 85
Keywords: Beta, Betting Against Beta, Lottery Demand, Stock Returns, Funding Liquidity
JEL Classification: G11, G12, G14
Date posted: March 13, 2014 ; Last revised: August 8, 2015
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