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Speculative Betas

Harrison G. Hong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

David Alexandre Sraer

University of California, Berkeley; Princeton University

June 15, 2015

Journal of Finance, Forthcoming

The risk and return trade-off, the cornerstone of modern asset pricing theory, is often of the wrong sign. Our explanation is that high beta assets are more prone to speculative overpricing than low beta ones. When investors disagree about the prospects of the stock market, high beta assets are more sensitive to this aggregate disagreement and experience a greater divergence of opinion about their payoffs. These assets experience speculative demand from optimistic investors. Short-sales constraints then result in these high beta assets being over-priced. When aggregate disagreement is high, expected returns can actually decrease with beta, especially for stocks with low idiosyncratic variance and hence where the cost of taking speculative positions is smaller. We confirm our theory using a measure of disagreement about stock market earnings.

Number of Pages in PDF File: 84

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Date posted: December 3, 2011 ; Last revised: November 21, 2015

Suggested Citation

Hong, Harrison G. and Sraer, David Alexandre, Speculative Betas (June 15, 2015). Journal of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1967462 or http://dx.doi.org/10.2139/ssrn.1967462

Contact Information

Harrison G. Hong (Contact Author)
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
David Alexandre Sraer
University of California, Berkeley ( email )
310 Barrows Hall
Berkeley, CA 94720
United States
Princeton University ( email )
22 Chambers Street
Princeton, NJ 08544
United States

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