| All real-world investors face funding constraints such as leverage constraints and margin requirements,and these constraints influence investors'required returns across securities and overtime.Frazzini and Pedersen?2014?propose that investors with borrowing constraints will tilt toward risky stocks in portfolio construction,which driving lower alpha for high-beta stocks.They further find that the betting against beta?BAB?portfolio of buying stocks with low beta and selling stocks with high beta produces a significantly positive annualized risk-adjusted return of 8.76%in U.S.equity market.They also find this anomaly in 18 of 19 international equity markets,in Treasury markets,for corporate bonds sorted by maturity and by rating,and in futures markets.This study investigates the BAB investment strategy in the Chinese market.And the sample in this study is Chinese A shares between January 2007 and December 2016.Consistent with Frazzini and Pedersen?2014?,I have the following findings.The study found that during the sample period,there was a clear“Beta Anomalies”in the Chinese A-share market.“Beta Anomalies”denotes a phenomenon that Low-beta asset risk-adjusted returns higher than high-beta asset risk-adjusted returns.And I found that the phenomenon of high-beta stock associated with low-alpha exists in China,which is the well-known relatively flat security market line.Because of the existence of“Beta Anomalies”in Chinese equity market,I built a risk-free portfolio BAB by long leveraged low-beta stocks and shortsells de-leveraged high-beta stocks,thus maintaining a beta-neutral portfolio.And I found that the average abnormal return of the BAB portfolio was0.7051%per month during January 2007 to December 2016.To test the impact of a shock to funding constraints on the return of BAB portfolio,I use the FCS as a measure of funding conditions.FCS is the difference between the three-month Shanghai Interbank Offered Rate and the three-month Chinese debt bond interest rate.The larger the FCS,the higher the portfolio constraints?or margin requirements?;and the smaller the FCS,the lower the portfolio constraints?or margin requirements?.The time-varying funding constraints negatively influence BAB returns.Then I want to test the influence of funding liquidity risk.I use the volatility of FCS spread(FCS spread=--1)as an empirical proxy for funding liquidity risk.When the funding liquidity risk increases,the conditional return betas of all securities are compressed toward one;and the conditional beta of the BAB portfolio becomes positive?exhibits a Inverted U-shaped pattern?,even though it is market neutral relative to the information set used for portfolio formation.At last,I analyzed the impact of the margin trading and short selling system in China's A-share market on the return of BAB portfolio.The bans on margin trading and short selling were lifted on March 31,2010.By utilizing this special institutional setting,I found that the monthly average excess return generated by the BAB portfolio of companies with margin trading and short selling is higher than companies that cannot engage in margin trading and short selling. |
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