Zero-Beta (Factor-Neutral) Portfolios

Zero-beta portfolios (factor-neutral portfolios) are constructed to eliminate exposure to systematic risk within a factor model. This paper examines their novel role in empirical asset pricing. I develop a unified framework for testing and comparing factor models based on the maximum Sharpe ratio of zero-investment zero-beta portfolios, which is broadly applicable and robust to practical frictions. Although all models are formally misspecified, machine learning–based approaches dominate conventional ones. I further propose an optimal zero-beta investment strategy that exploits model mispricing, delivering robust out-of-sample performance and outperforming most established strategies after accounting for transaction costs. I demonstrate that, in practice, leveraging modern asset pricing models may be more effective by systematically trading model mispricings rather than harvesting factor risk premia. Finally, I show that using unit-investment zero-beta portfolios to estimate the zero-beta rate introduces an upward bias proportional to the degree of model misspecification.

The Zero-Beta Rate Revisited

The zero-beta rate is an important concept in asset pricing due to its implications for the security market line, beta anomaly, risk-free rate, etc. This paper revisits the estimation of the zero-beta rate and argues that existing methods produce high and volatile zero-beta rates arising from two channels: model misspecification and error-invariables. Any model misspecification leads to a non-uniqueness of the zero-beta rate. Measurement errors in betas increase noise in the estimation. Simulation analysis shows that both channels are quantitatively important for increasing the mean and volatility of the estimated zero-beta rate.

• Conferences: AFA 2025 Ph.D. Poster Session

Fiscal Policy and the Government Debt Maturity Structure

This paper studies the attenuating effects of government debt maturity structure on the transmission of fiscal policy shocks. I use local projection methods with external instrumental variables to show that longer maturity or duration significantly dampens the output expansionary and in ationary effects of fiscal policy. A model of fiscal theory of price level is able to nicely rationalize my empirical findings. The main mechanism is that longer duration of the debt portfolio allows the government to exploit more capital gains against the private investors in face of a deficit shock, reducing the desire to inflate away existing debt.

Fiscal Shocks and Beliefs with Anna Cieslak and Hao Pang