Betting Against Beta

71 Pages Posted: 13 Dec 2010 Last revised: 13 May 2023

See all articles by Andrea Frazzini

Andrea Frazzini

AQR Capital Management, LLC

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

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Date Written: December 2010

Abstract

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.

Suggested Citation

Frazzini, Andrea and Pedersen, Lasse Heje, Betting Against Beta (December 2010). NBER Working Paper No. w16601, Available at SSRN: https://ssrn.com/abstract=1723048

Andrea Frazzini (Contact Author)

AQR Capital Management, LLC ( email )

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HOME PAGE: http://www.econ.yale.edu/~af227/

Lasse Heje Pedersen

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

New York University (NYU) ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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