Programming note: Money Stuff will be off for the rest of the year, back on January 6. Happy Holidays!
I’ve probably been doing this too long, because I find myself increasingly attracted to financial theories that say that bad things are actually good. The most fundamental of these theories is that investors prefer risk to safety, and so risky investments are valued more highly than safe ones. This is counterintuitive, but pretty well established. There’s a 2013 paper on “Betting Against Beta” by Andrea Frazzini and Lasse Heje Pedersen of AQR Capital Management: For behavioral and leverage-constraint reasons, it seems “that risky high-beta assets require lower risk-adjusted returns than low-beta assets,” meaning that risky assets cost more than safe ones. “The missing risk premium” and the “low volatility anomaly” express similar ideas.
