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Beta uncertainty

Fabian Hollstein, Marcel Prokopczuk () and Chardin Wese Simen

Journal of Banking & Finance, 2020, vol. 116, issue C

Abstract: A stock’s exposure to systematic risk factors is surrounded by substantial uncertainty. This beta uncertainty is both economically and statistically significantly priced in the cross-section of stock returns. Stocks with high beta uncertainty substantially underperform those with low beta uncertainty: a two-standard-deviation increase in the measure decreases average annual returns by 9.7%. These results cannot be explained by previously discovered determinants of cross-sectional stock returns. Aggregate beta uncertainty negatively predicts market excess returns in the short and medium term. We find supporting evidence for a mispricing explanation of the beta uncertainty premium.

Keywords: Beta; CAPM; Disagreement; Ambiguity; Parameter uncertainty (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jbankfin.2020.105834

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