Beta and Biased Beliefs

38 Pages Posted: 20 Jun 2016 Last revised: 29 Apr 2019

See all articles by Heiko Jacobs

Heiko Jacobs

University of Duisburg-Essen, Campus Essen

Date Written: April 27, 2019

Abstract

Relying on 120 million firm days from 29 stock markets, I provide evidence consistent with the conjecture that the well-established beta anomaly is at least partly the result of mispricing caused by investors' expectational errors and biased beliefs. First, long/short return spreads across the globe are several times larger surrounding earnings announcements. Second, the anomaly is largely explained by a country-level composite mispricing factor. Third, local sentiment positively predicts alphas. Fourth, the anomaly is concentrated in excessively traded stocks. Finally, abnormal returns are larger in countries characterized by lower uncertainty avoidance. Further in line with behavioral theories, my results tend to be stronger when limits to arbitrage are more binding.

Keywords: international stock markets, beta anomaly, risk/return trade-off, investor biases, behavioral finance

JEL Classification: G02, G12, G14, G15

Suggested Citation

Jacobs, Heiko, Beta and Biased Beliefs (April 27, 2019). Available at SSRN: https://ssrn.com/abstract=2798156 or http://dx.doi.org/10.2139/ssrn.2798156

Heiko Jacobs (Contact Author)

University of Duisburg-Essen, Campus Essen ( email )

Universitätsstr. 9
Essen, 45141
Germany
+49-(0)621-181-3453 (Phone)
+49-(0)621-181-1534 (Fax)

HOME PAGE: http://sites.google.com/site/heikojacobsfinance/

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