Beta and Biased Beliefs
38 Pages Posted: 20 Jun 2016 Last revised: 29 Apr 2019
Date Written: April 27, 2019
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: Suggested Citation