TY - JOUR
T1 - Leverage constraints and asset prices
T2 - Insights from mutual fund risk taking
AU - Boguth, Oliver
AU - Simutin, Mikhail
N1 - Funding Information:
We thank an anonymous referee, Hank Bessembinder, Scott Cederburg, Zhuo Chen, Wayne Ferson (discussant), Jean-Sébastien Fontaine, Andrea Frazzini (discussant), Ruslan Goyenko, Marcin Kacperczyk, Andrew Karolyi, Mike Lemmon, Dong Lou (discussant), Andrea Lu, Tyler Muir, Lasse Pedersen, David Schreindorfer, Pierre Six (discussant), Dimitri Vayanos, Sunil Wahal, and seminar participants at Arizona State University, the University of Oklahoma, the University of Washington, the 2014 University of Minnesota Junior Finance Conference, the 2015 AQR Insight Award finalists presentation, the 2015 IDC Herzliya Conference, the 2015 meeting of the French Finance Association, the 2015 University of Oregon Finance Conference, the 2016 meeting of the American Finance Association, and the 2016 BlackRock Research Offsite Conference for helpful comments. Simutin gratefully acknowledges support from the Social Sciences and Humanities Research Council of Canada (grant no. 430-2013-0588) and from the Bank of Canada. The views expressed herein are not necessarily those of the Bank of Canada and are the authors’ alone.
Funding Information:
We thank an anonymous referee, Hank Bessembinder, Scott Cederburg, Zhuo Chen, Wayne Ferson (discussant), Jean-Sébastien Fontaine, Andrea Frazzini (discussant), Ruslan Goyenko, Marcin Kacperczyk, Andrew Karolyi, Mike Lemmon, Dong Lou (discussant), Andrea Lu, Tyler Muir, Lasse Pedersen, David Schreindorfer, Pierre Six (discussant), Dimitri Vayanos, Sunil Wahal, and seminar participants at Arizona State University, the University of Oklahoma, the University of Washington, the 2014 University of Minnesota Junior Finance Conference, the 2015 AQR Insight Award finalists presentation, the 2015 IDC Herzliya Conference, the 2015 meeting of the French Finance Association, the 2015 University of Oregon Finance Conference, the 2016 meeting of the American Finance Association, and the 2016 BlackRock Research Offsite Conference for helpful comments. Simutin gratefully acknowledges support from the Social Sciences and Humanities Research Council of Canada (grant no. 430-2013-0588 ) and from the Bank of Canada. The views expressed herein are not necessarily those of the Bank of Canada and are the authors’ alone.
Publisher Copyright:
© 2017 Elsevier B.V.
PY - 2018/2
Y1 - 2018/2
N2 - 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 reaches 7%. Our results show that the tightness of leverage constraints has important implications for asset prices.
AB - 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 reaches 7%. Our results show that the tightness of leverage constraints has important implications for asset prices.
KW - Asset prices
KW - Betting-against-beta
KW - Cross-section of stock returns
KW - Leverage constraints
KW - Mutual fund performance
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U2 - 10.1016/j.jfineco.2017.12.002
DO - 10.1016/j.jfineco.2017.12.002
M3 - Article
AN - SCOPUS:85038971131
SN - 0304-405X
VL - 127
SP - 325
EP - 341
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 2
ER -