Speculative Betas

51 Pages Posted: 20 Nov 2012 Last revised: 7 Mar 2022

See all articles by Harrison G. Hong

Harrison G. Hong

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

David Alexandre Sraer

Princeton University; University of California, Berkeley

Multiple version iconThere are 2 versions of this paper

Date Written: November 2012


We provide a model for why high beta assets are more prone to speculative overpricing than low beta ones. When investors disagree about the common factor of cash-flows, high beta assets are more sensitive to this macro-disagreement and experience a greater divergence-of-opinion about their payoffs. Short-sales constraints for some investors such as retail mutual funds result in high beta assets being over-priced. When aggregate disagreement is low, expected return increases with beta due to risk-sharing. But when it is large, expected return initially increases but then decreases with beta. High beta assets have greater shorting from unconstrained arbitrageurs and more share turnover. Using measures of disagreement about stock earnings and economic uncertainty, we verify these predictions. A calibration exercise yields reasonable parameter values.

Suggested Citation

Hong, Harrison G. and Sraer, David Alexandre and Sraer, David Alexandre, Speculative Betas (November 2012). NBER Working Paper No. w18548, Available at SSRN: https://ssrn.com/abstract=2178327

Harrison G. Hong (Contact Author)

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

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National Bureau of Economic Research (NBER)

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David Alexandre Sraer

University of California, Berkeley ( email )

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Princeton University ( email )

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