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Beta uncertainty

Author

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  • Hollstein, Fabian
  • Prokopczuk, Marcel
  • Wese Simen, Chardin

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.

Suggested Citation

  • Hollstein, Fabian & Prokopczuk, Marcel & Wese Simen, Chardin, 2020. "Beta uncertainty," Journal of Banking & Finance, Elsevier, vol. 116(C).
    • Handle: RePEc:eee:jbfina:v:116:y:2020:i:c:s0378426620301011
    DOI: 10.1016/j.jbankfin.2020.105834
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    More about this item

    Keywords

    Beta; CAPM; Disagreement; Ambiguity; Parameter uncertainty;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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