Speculative Betas

84 Pages Posted: 3 Dec 2011 Last revised: 21 Nov 2015

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

David Alexandre Sraer

University of California, Berkeley; Princeton University

Multiple version iconThere are 2 versions of this paper

Date Written: June 15, 2015

Abstract

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.

Suggested Citation

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

Harrison G. Hong (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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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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