Beta Bubbles

Petri Jylhä, Matti Suominen and Tuomas Tomunen

The Review of Asset Pricing Studies, 2018, vol. 8, issue 1, 1-35

Abstract: We show that an increase in a stock’s breadth of institutional ownership or turnover is followed by a significant, but temporary, increase in its CAPM beta estimate and a decrease in its CAPM alpha. The increasing effect of breadth of ownership on beta estimates is mainly driven by short-term investors. These transitory trading-activity-driven components of beta estimates contribute to the empirical failure of the CAPM and the large returns to long-short portfolios that bet against beta. Relations between ownership breadth, turnover, and betas, which we document, help explain the puzzling fact that, on average, betas increase after seasoned equity offerings and stock splits and decrease after stock repurchases.Received November 26, 2015; editorial decision February 17, 2017 by Editor Jeffrey Pontiff.

Date: 2018
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