Beta Bubbles

Review of Asset Pricing Studies (Forthcoming)

53 Pages Posted: 25 Aug 2015 Last revised: 26 Feb 2017

See all articles by Petri Jylha

Petri Jylha

Aalto University

Matti Suominen

Aalto University School of Business

Tuomas Tomunen

Columbia University - Columbia Business School

Date Written: February 1, 2017

Abstract

We show that an increase in a stock’s breadth of institutional ownership or turnover is followed by a significant but temporary increase in its CAPM beta estimate and a decrease in its CAPM alpha. The increasing effect of breadth of ownership on beta estimates strengthens if we classify institutional investors by their historical trading horizon and look at the effect of changes in the ownership breadth of short-horizon institutional investors. These transitory, trading activity-driven components of beta estimates that we find contribute to the empirical failure of the CAPM and the large returns to long-short portfolios that bet against beta. In addition, the relations between ownership breadth, turnover and betas that we document help explain the puzzling fact that on average betas increase after seasoned equity offerings and stock splits, and decrease after stock repurchases.

Keywords: Beta, CAPM, Comovement, Institutional investors

JEL Classification: G12

Suggested Citation

Jylha, Petri and Suominen, Matti and Tomunen, Tuomas, Beta Bubbles (February 1, 2017). Review of Asset Pricing Studies (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2650404 or http://dx.doi.org/10.2139/ssrn.2650404

Petri Jylha

Aalto University ( email )

P.O. Box 21220
Aalto, 00076
Finland

Matti Suominen (Contact Author)

Aalto University School of Business ( email )

PO Box 1210
FI-00101 Helsinki
Finland
+358-50-5245678 (Phone)

Tuomas Tomunen

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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