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

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  • Hwang, Soosung
  • Rubesam, Alexandre
  • Salmon, Mark

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.

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  • Hwang, Soosung & Rubesam, Alexandre & Salmon, Mark, 2021. "Beta herding through overconfidence: A behavioral explanation of the low-beta anomaly," Journal of International Money and Finance, Elsevier, vol. 111(C).
    • Handle: RePEc:eee:jimfin:v:111:y:2021:i:c:s0261560620302746
    DOI: 10.1016/j.jimonfin.2020.102318
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    13. Bradrania, Reza & Veron, Jose Francisco & Wu, Winston, 2023. "The beta anomaly and the quality effect in international stock markets," Journal of Behavioral and Experimental Finance, Elsevier, vol. 38(C).
    14. Agoraki, Maria-Eleni & Aslanidis, Nektarios & Kouretas, Georgios P., 2021. "U.S. Banks’ lending behaviour, financial stability, and investor sentiment: A textual analysis," Working Papers 2072/534915, Universitat Rovira i Virgili, Department of Economics.
    15. Abraham Oketooyin GBADEBO & Yusuf Olatunji OYEDEKO, 2022. "Effect Of Liquidity Risk On Low Volatility Anomaly In Nigerian Stock Market," Contemporary Economy Journal, Constantin Brancoveanu University, vol. 7(3), pages 25-42.
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    More about this item

    Keywords

    Beta; Herding; Overconfidence; Low-beta anomaly;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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