Systematic Risk and Share Turnover [or Beta as a Measure of Mispricing]

54 Pages Posted: 5 Jun 2016

See all articles by Maria Kasch

Maria Kasch

University of Mannheim - Department of Finance

Date Written: June 2, 2016

Abstract

This paper documents a simple and powerful cross-sectional mechanism: a higher rate of investor participation in trading 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.

Suggested Citation

Kasch, Maria, Systematic Risk and Share Turnover [or Beta as a Measure of Mispricing] (June 2, 2016). Paris December 2016 Finance Meeting EUROFIDAI - AFFI, Available at SSRN: https://ssrn.com/abstract=2789315 or http://dx.doi.org/10.2139/ssrn.2789315

Maria Kasch (Contact Author)

University of Mannheim - Department of Finance ( email )

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