Lasse Heje Pedersen wins JFE's Fama-DFA Best Paper Prize
Lasse Heje Pedersen, Professor at the Department of Finance and member of the Center for Financial Frictions, has won the second prize of the Fama/DFA Prize for Capital Markets and Asset Pricing in the 2020 JFE Best Paper Contests for his paper 'Betting against correlation: Testing theories of the low-risk effect'. The paper was published in 2020 in the Journal of Financial Economics and is co-authored with Clifford S. Asness (AQR Capital Management), Andrea Frazzini (AQR Capital Management) and Niels Joachim Gormsen (University of Chicago, Booth School of Business).
About the paper 'Betting against correlation: Testing theories of the low-risk effect':
We test whether the low-risk effect is driven by leverage constraints and, thus, risk should be measured using beta versus behavioral effects and, thus, risk should be measured by idiosyncratic risk. Beta depends on volatility and correlation, with only volatility related to idiosyncratic risk. We introduce a new betting against correlation (BAC) factor that is particularly suited to differentiate between leverage constraints and behavioral explanations. BAC produces strong performance in the US and internationally, supporting leverage constraint theories. Similarly, we construct the new factor SMAX to isolate lottery demand, which also produces positive returns. Consistent with both leverage and lottery theories contributing to the low-risk effect, we find that BAC is related to margin debt while idiosyncratic risk factors are related to sentiment. Find the paper here.
About the Fama-DFA Prizes for Capital Markets and Asset Pricing:
Each year, after the last issue of the Journal of Financial Economics has reached subscribers, the editorial office of the JFE collects votes from readers for the best paper in each of these broad categories. The editorial office will publish on the home page, http://jfe.rochester.edu the list of papers published in the JFE in the prior year assigned to one of these two research areas. Read more about the prize here.