Economic Uncertainty and the Beta Anomaly

66 Pages Posted: 28 Feb 2022 Last revised: 8 Jan 2024

See all articles by Zhiqi Cao

Zhiqi Cao

Shanghai Jiao Tong University (SJTU)

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management

Youchang Wu

University of Oregon - Lundquist College of Business

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

Cao, Zhiqi and Wu, Wenfeng and Wu, Youchang, Economic Uncertainty and the Beta Anomaly (January 4, 2024). Available at SSRN: https://ssrn.com/abstract=4034987 or http://dx.doi.org/10.2139/ssrn.4034987

Zhiqi Cao

Shanghai Jiao Tong University (SJTU) ( email )

KoGuan Law School
Shanghai 200030, Shanghai 200052
China

Wenfeng Wu (Contact Author)

Shanghai Jiao Tong University - Antai College of Economics & Management ( email )

No. 1954 Huashan Road
Shanghai, Shanghai 200030
China

Youchang Wu

University of Oregon - Lundquist College of Business ( email )

1280 University of Oregon
Eugene, OR 97403
United States

HOME PAGE: http://www.youchangwu.com

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