A Lottery Demand-Based Explanation of the Beta Anomaly

104 Pages Posted: 13 Mar 2014 Last revised: 3 Dec 2016

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Stephen Brown

New York University (NYU) - Leonard N. Stern School of Business

Scott Murray

Georgia State University

Yi Tang

Fordham University - Gabelli School of Business

Date Written: December 1, 2016

Abstract

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. The beta anomaly is no longer detected when beta-sorted portfolios are neutralized to lottery demand, regression specifications control for lottery demand, or factor models include a lottery demand factor. The beta anomaly is concentrated in stocks with low levels of institutional ownership and it exists only when the price impact of lottery demand is concentrated in high-beta stocks.

Keywords: Beta, Beta Anomaly, Lottery Demand, Stock Returns, Institutional Ownership

JEL Classification: G11, G12, G14

Suggested Citation

Bali, Turan G. and Brown, Stephen and Murray, Scott and Tang, Yi, A Lottery Demand-Based Explanation of the Beta Anomaly (December 1, 2016). Georgetown McDonough School of Business Research Paper No. 2408146. Available at SSRN: https://ssrn.com/abstract=2408146 or http://dx.doi.org/10.2139/ssrn.2408146

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: http://msbonline.georgetown.edu/faculty-research/msf-faculty/turan-bali

Stephen Brown

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

Scott Murray (Contact Author)

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

Yi Tang

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States

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