Systematic Risk and Share Turnover
54 Pages Posted: 1 Jan 2016
Date Written: December 28, 2015
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: Suggested Citation