Systematic Risk and Share Turnover

54 Pages Posted: 1 Jan 2016

See all articles by Maria Kasch

Maria Kasch

University of Mannheim - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 28, 2015

Abstract

This paper documents a simple and powerful cross-sectional mechanism: a higher rate of Investor participation in a stock translates into a greater contribution of the stock to market movements. The participation-driven overreaction (1) forms a persistent source of excess market volatility and, by implication, return predictability, (2) introduces a strong mechanical element into the beta-return relation, making this relation conditional on market state and challenging the meaningfulness of traditional tests of the CAPM, and (3) suggests that the low-risk anomaly (Black et al. (1972)) reflects a reversal of overreaction in the cross-section of stock returns. The endogeneity of market beta challenges the mainstream interpretation of the systematic risk-return relation and the notion of risk-adjusted returns in the finance literature.

Keywords: Market volatility, Short- and long-horizon betas, Parallel response to common shocks, Crowded-trade problem, Endogenous beta, Low-risk anomaly, Risk-return relation

JEL Classification: G12

Suggested Citation

Kasch, Maria, Systematic Risk and Share Turnover (December 28, 2015). Available at SSRN: https://ssrn.com/abstract=2708947 or http://dx.doi.org/10.2139/ssrn.2708947

Maria Kasch (Contact Author)

University of Mannheim - Department of Finance ( email )

L5, 2, room 105
Mannheim, 68161
Germany
+49 621 181 1514 (Phone)
+49 621 181 1519 (Fax)

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