Beta herding through overconfidence: A behavioral explanation of the low-beta anomaly

Soosung Hwang, Alexandre Rubesam and Mark Salmon

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Abstract: 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: BetaHerdingOverconfidenceLow-beta; anomaly (search for similar items in EconPapers)
Date: 2021-03
Note: View the original document on HAL open archive server: https://hal.science/hal-03275894
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Citations: View citations in EconPapers (17)

Published in Journal of International Money and Finance, 2021, 111, pp.102318. ⟨10.1016/j.jimonfin.2020.102318⟩

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Journal Article: Beta herding through overconfidence: A behavioral explanation of the low-beta anomaly (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03275894

DOI: 10.1016/j.jimonfin.2020.102318

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