Beta herding through overconfidence: A behavioral explanation of the low-beta anomaly
Alexandre Rubesam and
Journal of International Money and Finance, 2021, vol. 111, issue C
We investigate asset returns using the concept of beta herding, which measures cross-sectional variations in betas due to changes in investors’ confidence about their market outlook. Overconfidence causes beta herding (compression of betas towards the market beta), while under-confidence leads to adverse beta herding (dispersion of betas from the market beta). We show that the low-beta anomaly can be explained by a return reversal following adverse beta herding, as high beta stocks underperform low beta stocks exclusively following periods of adverse beta herding. This result is robust to investors’ preferences for lottery-like assets, sentiment, and return reversals, and beta herding leads time variation in betas.
Keywords: Beta; Herding; Overconfidence; Low-beta anomaly (search for similar items in EconPapers)
JEL-codes: C12 C31 G12 G14 (search for similar items in EconPapers)
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Working Paper: Beta herding through overconfidence: A behavioral explanation of the low-beta anomaly (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:111:y:2021:i:c:s0261560620302746
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