Speculative Betas

Harrison Hong and David Sraer

No 18548, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We provide a model for why high beta assets are more prone to speculative overpricing than low beta ones. When investors disagree about the common factor of cash-flows, high beta assets are more sensitive to this macro-disagreement and experience a greater divergence-of-opinion about their payoffs. Short-sales constraints for some investors such as retail mutual funds result in high beta assets being over-priced. When aggregate disagreement is low, expected return increases with beta due to risk-sharing. But when it is large, expected return initially increases but then decreases with beta. High beta assets have greater shorting from unconstrained arbitrageurs and more share turnover. Using measures of disagreement about stock earnings and economic uncertainty, we verify these predictions. A calibration exercise yields reasonable parameter values.

JEL-codes: G02 G11 G12 (search for similar items in EconPapers)
Date: 2012-11
Note: AP CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published as Harrison Hong & David A. Sraer, 2016. "Speculative Betas," Journal of Finance, American Finance Association, vol. 71(5), pages 2095-2144, October.

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Journal Article: Speculative Betas (2016)
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