Betting Against Beta or Demand for Lottery
79 Pages Posted: 17 Aug 2014
Date Written: August 1, 2014
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 plays a significant role in generating the betting against beta phenomenon. Portfolio and regression analyses show that, after controlling for lottery demand, the betting against beta phenomenon disappears, while other firm characteristics, measures of risk, and funding liquidity sensitivity measures 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. We conclude that the betting against beta phenomenon is a manifestation of demand for lottery-like stocks.
Keywords: Beta, Betting Against Beta, Lottery Demand, Stock Returns, Funding Liquidity
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation