AQR Insight Award

Bear Beta


Zhongjin Lu, Ph.D., University of Georgia Terry College of Business and Scott Murray, Ph.D., Georgia State University J. Mack Robinson College of Business

Investors naturally prefer to avoid the impact of poor market states and the accompanying portfolio drawdowns. Consequently, intuition and theory suggest that investors’ preference for investments that do well during bear markets will be priced at a premium — outperforming during poor market states (and thus providing downside protection) comes at the cost of earning low average returns over the long term. The authors seek to estimate this tradeoff. They test the performance of stocks over several market cycles and find that stocks that outperform during bear markets also underperform on average over time.  The authors identify a new priced risk factor, which they call the bear factor, that is able to predict stock sensitivity to future bear markets and that negatively relates to expected stock returns on average.