Speculative Betas

Hong, Harrison; Sraer, David

doi:10.1111/jofi.12431

Cited by 248 publications

(119 citation statements)

References 77 publications

(134 reference statements)

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“…The finding that higher leverage growth forecasts lower returns in the cross section is in the spirit of Hong and Sraer (2014) and Frazzini and Pedersen (2014), who argue that speculative investors drive down expected returns of stocks with high embedded leverage.…”

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confidence: 82%

The Cost of Capital of the Financial Sector

2015

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confidence: 82%

The Cost of Capital of the Financial Sector

2015

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“…While the global size and book-to-market portfolios are not accounted for in our theory, we control for these variables as it is well known that these factors have an effect on the shape of the SML as well (see, e.g., Hong and Sraer (2016)). The estimated coefficients are presented in Table 3.…”

Section: Global Illiquidity and The Security Market Linementioning

confidence: 99%

International Illiquidity

Malkhozov

Mueller

Vedolin

2017

internationalfinance

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We build a parsimonious international asset pricing model in which deviations of government bond yields from a fitted yield curve of a country measure the tightness of investors' capital constraints. We compute these measures at daily frequency for six major markets and use them to test the modelpredicted effect of funding conditions on asset prices internationally. Global illiquidity lowers the slope and increases the intercept of the international security market line. Local illiquidity helps explain the variation in alphas, Sharpe ratios, and the performance of betting-against-beta (BAB) strategies across countries. The recent financial crisis has dramatically illustrated how market frictions can impede orderly investment activity and have significant effects on asset prices.1 These phenomena are even more prominent when looking at asset prices in an international context where specialized institutions, such as hedge funds and investment banks, are responsible for a large fraction of active cross-country investments. In order to understand the specific mechanisms at work and to test various friction-based asset pricing theories, researchers and policymakers alike require economically-motivated indicators of market stress.In this paper, we study the effect of frictions, such as funding constraints or barriers that impede smooth cross-border movement of capital, on asset prices internationally.We generically refer to the tightness of these frictions as illiquidity. Our contribution to the existing literature is threefold. First, we develop a parsimonious international asset pricing model with constrained investors who trade in equity and bond markets globally.Second, we construct model-implied proxies for country-level and global illiquidity from daily bond market data of six developed countries. Third, in line with the model predictions, we find that global illiquidity affects the international risk-return trade-off by lowering the slope and increasing the intercept of the international security market line, stocks in countries with higher local illiquidity earn higher alphas and Sharpe ratios, and, as a result, accounting for the cross-country differences in illiquidity improves on the performance of traditional betting-against-beta (BAB) type strategies.We measure illiquidity as the average squared deviation of observed government bond prices from those implied by a smooth fitted yield curve. This approach has been proposed by Hu, Pan, and Wang (2013), who argue that "noise" in the US Treasury yield curve contains a strong signal about the general scarcity of investment capital in financial markets. Government bonds are particularly well suited in this context because they are among the safest and most liquid assets, they are actively traded for investment purposes, and they are used as the main source of collateral to obtain funding.Moreover, their prices are known to be well described by a simple factor structure during normal times. In our model bond price deviations emerge in equilibrium because ...

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“…Antoniou et al (2015) find evidence that sentiment affects the security market line; noise traders appear to be more bullish about high-beta stocks when market sentiments are good. Combining both market sentiments and limits to arbitrage, Hong and Sraer (2016) propose a model where the direction of the risk-return relationship depends on disagreement about the market's prospect;…”

Section: Literature Reviewmentioning

confidence: 99%