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 - School of Business
January 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. Portfolio and regression analyses show that lottery demand helps explain the beta anomaly. Factor models that include our lottery demand factor explain the abnormal returns associated with the beta anomaly. After controlling for lottery demand, portfolio and regression analyses detect a security market line slope that is significantly positive and insignificantly different from the market risk premium. Finally, the beta anomaly only exists 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: 89
Keywords: Beta, Beta Anomaly, Lottery Demand, Stock Returns
JEL Classification: G11, G12, G14
Date posted: March 13, 2014 ; Last revised: January 29, 2016
© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.
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