Journal ArticleDOI
Leverage Constraints and Asset Prices: Insights from Mutual Fund Risk Taking
Oliver Boguth,Mikhail Simutin +1 more
TLDR
The authors show that the average market beta of actively managed mutual funds captures their desire for leverage and thus the tightness of constraints, and they propose a measure for this leverage constraint tightness by inverting the argument that constrained investors tilt their portfolios to riskier assets.Abstract:
Prior theory suggests that time variation in the degree to which leverage constraints bind affects the pricing kernel. We propose a measure for this leverage constraint tightness by inverting the argument that constrained investors tilt their portfolios to riskier assets. We show that the average market beta of actively managed mutual funds -- intermediaries facing leverage restrictions -- captures their desire for leverage and thus the tightness of constraints. Consistent with theory, it strongly predicts returns of the betting-against-beta portfolio, and is a priced risk factor in the cross-section of mutual funds and stocks. Funds with low exposure to the factor outperform high-exposure funds by 5% annually, and for stocks this difference exceeds 8%. Our results show that the tightness of leverage constraints has important implications for asset prices.read more
Citations
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Posted Content
A Very Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix
Journal ArticleDOI
Does It Pay to Bet Against Beta? On the Conditional Performance of the Beta Anomaly
TL;DR: In this article, the conditional market risk for a high-minus-low-beta portfolio was modeled using instrumental variables methods and found that the conditional CAPM resolves the beta anomaly.
Journal ArticleDOI
Margin Constraints and the Security Market Line
TL;DR: In this article, the authors show that between the years 1934 and 1974, the Federal Reserve actively managed the initial margin requirement in the U.S. stock market and used this exogenous variation in margin requirements to test whether funding constraints aect the security market line, i.e. the relation between betas and expected returns.
Journal ArticleDOI
Betting Against Correlation: Testing Theories of the Low-Risk Effect
Clifford S. Asness,Andrea Frazzini,Niels Joachim Gormsen,Lasse Heje Pedersen,Lasse Heje Pedersen +4 more
TL;DR: In this paper, the authors test whether the low-risk effect is driven by leverage constraints and behavioral effects and thus risk should be measured by idiosyncratic risk, and they find that BAC is related to margin debt while the other risk factors are related to sentiment and casino profits.
References
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Journal ArticleDOI
Common risk factors in the returns on stocks and bonds
Eugene F. Fama,Kenneth R. French +1 more
TL;DR: In this article, the authors identify five common risk factors in the returns on stocks and bonds, including three stock-market factors: an overall market factor and factors related to firm size and book-to-market equity.
ReportDOI
A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix
Whitney K. Newey,Kenneth D. West +1 more
TL;DR: In this article, a simple method of calculating a heteroskedasticity and autocorrelation consistent covariance matrix that is positive semi-definite by construction is described.
Journal ArticleDOI
The Cross‐Section of Expected Stock Returns
Eugene F. Fama,Kenneth R. French +1 more
TL;DR: In this paper, Bhandari et al. found that the relationship between market/3 and average return is flat, even when 3 is the only explanatory variable, and when the tests allow for variation in 3 that is unrelated to size.
Journal ArticleDOI
Risk, Return, and Equilibrium: Empirical Tests
Eugene F. Fama,James D. MacBeth +1 more
TL;DR: In this article, the relationship between average return and risk for New York Stock Exchange common stocks was tested using a two-parameter portfolio model and models of market equilibrium derived from the two parameter portfolio model.
Journal ArticleDOI
Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency
TL;DR: In this article, the authors show that strategies that buy stocks that have performed well in the past and sell stocks that had performed poorly in past years generate significant positive returns over 3- to 12-month holding periods.