Investor overconfidence and the security market line: New evidence from China
Kai Li and
Journal of Economic Dynamics and Control, 2020, vol. 117, issue C
This paper documents a highly downward-sloping security market line (SML) in China, which is more puzzling than the typical “flattened” SML in the US, and does not reconcile with existing theories of the low-beta anomaly. We show that investor overconfidence offers some promises in resolving the puzzle in China: In the time-series dimension, the slope of the SML becomes more “inverted” when investors get more overconfident. This dynamic overconfidence effect is intensified with biased self-attribution. As a general symptom of overconfidence in the cross section, high-beta stocks are also the mostly heavily traded. After accounting for trading volume, there is no longer the low-beta anomaly at both the firm and portfolio levels. Mutual fund evidence reinforces the view that institutional investors actively exploit the portfolio implications of a downward-sloping SML by shying away from high-beta stocks and betting on low-beta stocks for superior performance.
Keywords: Security market line; Beta anomaly; Betting against beta; Overconfidence; Mutual fund (search for similar items in EconPapers)
JEL-codes: G11 G12 G15 G40 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:117:y:2020:i:c:s0165188920301299
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