A Lottery Demand-Based Explanation of the Beta Anomaly
Turan G. Bali
Georgetown University - Robert Emmett McDonough School of Business
New York University (NYU) - Leonard N. Stern School of Business
J. Mack Robinson College of Business - Georgia State University
Fordham University - Gabelli School of Business
May 1, 2016
Georgetown McDonough School of Business Research Paper No. 2408146
The low (high) abnormal returns of stocks with high (low) beta -- the beta anomaly -- is one of the most persistent anomalies in empirical asset pricing research. This paper demonstrates that investors' demand for lottery-like stocks is an important driver of the beta anomaly. When beta-sorted portfolios are constructed to be neutral to lottery demand, the beta anomaly is no longer detected. Regression analyses indicate a positive and significant relation between beta and expected stock returns after controlling for lottery demand. The abnormal returns associated with the beta anomaly are explained by a lottery demand factor. The beta anomaly exists only when the price impact of lottery demand falls disproportionately on high-beta stocks and is concentrated in stocks with low levels of institutional ownership.
Number of Pages in PDF File: 83
Keywords: Beta, Beta Anomaly, Lottery Demand, Stock Returns
JEL Classification: G11, G12, G14
Date posted: March 13, 2014 ; Last revised: May 6, 2016
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