Economic Uncertainty and the Beta Anomaly
66 Pages Posted: 28 Feb 2022 Last revised: 8 Jan 2024
Date Written: January 4, 2024
Abstract
Using various measures of economic uncertainty, we find that the beta-alpha anomaly exists only when economic uncertainty is low. We argue that diminished risk appetite during high economic uncertainty eases leverage constraints of typical long-only investors, making overvaluation of high-beta stocks less likely. Consistent with this argument, the beta anomaly during low economic uncertainty is more pronounced among stocks heavily held by retail investors and active mutual funds and insignificant among stocks heavily held by hedge funds; investors and managers of actively-managed mutual funds chase high-beta (low-beta) securities when economic uncertainty is low (high) while hedge funds do the opposite; unexpected rises in economic uncertainty are associated with poor performance of high-minus-low beta portfolios.
Keywords: Economic uncertainty; ambiguity aversion; asset pricing anomaly; leverage constraint, mutual fund, hedge fund
JEL Classification: G12; G14
Suggested Citation: Suggested Citation