skip to content

Faculty of Economics

Journal Cover

Hwang, S., Rubesam, A. and Salmon, M.

Beta Herding Through Overconfidence: A Behavioral Explanation of the Low-Beta Anomaly

Journal of International Money and Finance

Vol. 111 (2021)

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: Beta, Herding, Overconfidence, Low-beta anomaly

JEL Codes: C12, C31, G12, G14

Author links: Mark Salmon  

Publisher's Link: https://doi.org/10.1016/j.jimonfin.2020.102318



Papers and Publications



Recent Publications


Ambrus, A. and Elliott, M. Investments in Social Ties, Risk Sharing, and Inequality Review of Economic Studies [2020]

Carvalho, V. M., Nirei, M., Saito, Y. U. and Tahbaz-Salehi, A. Supply Chain Disruptions: Evidence from the Great East Japan Earthquake Quarterly Journal of Economics, forthcoming [2021]

Biroli, P., Boneva, T., Raja, A. and Rauh, C. Parental Beliefs About Returns to Child Health Investments Journal of Econometrics [2020]

Li, Z. M., Laeven, R. J. A. and Vellekoop, M. H. Dependent Microstructure Noise and Integrated Volatility: Estimation from High-Frequency Data Journal of Econometrics [2020]