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

62 Pages Posted: 11 Feb 2002 Last revised: 19 Nov 2020

See all articles by Soosung Hwang

Soosung Hwang

Sungkyunkwan University - Department of Economics

Alexandre Rubesam

IESEG School of Management; French National Center for Scientific Research (CNRS) - Lille Economie & Management (LEM) UMR 9221

Mark Salmon

University of Cambridge - Faculty of Economics and Politics

Date Written: November 10, 2020

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 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

JEL Classification: C12, C31, G12, G14

Suggested Citation

Hwang, Soosung and Rubesam, Alexandre and Salmon, Mark Howard, Beta herding through overconfidence: A behavioral explanation of the low-beta anomaly (November 10, 2020). Available at SSRN: https://ssrn.com/abstract=299919 or http://dx.doi.org/10.2139/ssrn.299919

Soosung Hwang (Contact Author)

Sungkyunkwan University - Department of Economics ( email )

25-2 Sungkyunkwan-ro
Jongno-Gu
110-745 Seoul
+82 (0)2 760 0489 (Phone)
+82 (0)2 744 5717 (Fax)

Alexandre Rubesam

IESEG School of Management ( email )

Socle de la Grande Arche
1 Parvis de la Defense
Puteaux, Paris 92800
France

French National Center for Scientific Research (CNRS) - Lille Economie & Management (LEM) UMR 9221 ( email )

Lille
France

Mark Howard Salmon

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

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