Constraints to Leverage and Market Correlation

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Journal Title
Journal ISSN
Volume Title
School of Business | Master's thesis
Date
2019
Major/Subject
Mcode
Degree programme
Finance
Language
en
Pages
43
Series
Abstract
High risk stocks tend to produce lower risk-adjusted returns than their lower risk counterparts. I take a novel look at leverage constraints as the primary driver of the anomaly, in exploring the impact of changing margin requirements on compensation for market correlation and volatility. Using a dataset from the US stock market between 1934 and 1974, I find that conditioned on volatility, correlation with the market reflects the additional risk investors seek to take on when access to additional leverage is hindered. On the other hand, higher volatility does not seem to play much of a role in investors adjusting for changing conditions for leverage. Additionally, I apply my results in the context of a Betting Against Correlation factor and find the returns to be largely related to leverage constraints as predicted by previous research.
Description
Thesis advisor
Önal, Bünyamin
Keywords
low risk anomaly, beta anomaly, betting against correlation, leverage constraints
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Citation