Betting Against Beta or Demand for Lottery

79 Pages Posted: 17 Aug 2014

See all articles by Turan G. Bali

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

Georgia State University

Yi Tang

Fordham University - Gabelli School of Business

Date Written: August 1, 2014

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 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

Bali, Turan G. and Brown, Stephen and Murray, Scott and Tang, Yi, Betting Against Beta or Demand for Lottery (August 1, 2014). Available at SSRN: https://ssrn.com/abstract=2481344 or http://dx.doi.org/10.2139/ssrn.2481344

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: https://sites.google.com/a/georgetown.edu/turan-bali

Stephen Brown

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

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Scott Murray (Contact Author)

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

Yi Tang

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States

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