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Faculty of Economics

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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  

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