Leverage constraints and asset prices: Insights from mutual fund risk taking

Oliver Boguth, Mikhail Simutin

Research output: Contribution to journalArticlepeer-review

28 Scopus citations


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.

Original languageEnglish (US)
Pages (from-to)325-341
Number of pages17
JournalJournal of Financial Economics
Issue number2
StatePublished - Feb 2018


  • Asset prices
  • Betting-against-beta
  • Cross-section of stock returns
  • Leverage constraints
  • Mutual fund performance

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management


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