Beta herding through overconfidence: A behavioral explanation of the low-beta anomaly. (March 2021)

• Record Type: Journal Article
• Authors: Hwang, Soosung; Rubesam, Alexandre; Salmon, Mark
• Is Part Of: Journal of international money and finance. Volume 111(2021)
• Publication Date: 2021-03
• Subjects: Beta -- Herding -- Overconfidence -- Low-beta anomaly; C12 -- C31 -- G12 -- G14; International finance -- Periodicals; Foreign exchange -- Periodicals; Finances internationales -- Périodiques; Change -- Périodiques; Foreign exchange; International finance; Periodicals; 332.04205
• DOI: 10.1016/j.jimonfin.2020.102318
• Languages: English
• ISSNs: 0261-5606

Abstract

Highlights: Investor over/under-confidence creates cross-sectional variation in betas. Overconfidence causes beta herding (compression of betas towards the market beta) Under-confidence causes adverse beta herding (dispersion of betas from the market beta) The low-beta anomaly is explained by return reversal following adverse beta herding. This result is robust to lottery-like assets, sentiment, and time variation in betas. 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.