Absolving Beta of Volatility's Effects

37 Pages Posted: 7 Sep 2016 Last revised: 23 Sep 2018

See all articles by Jianan Liu

Jianan Liu

University of Pennsylvania, The Wharton School, Students

Robert F. Stambaugh

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Yu Yuan

Shanghai Mingshi Investment Company; University of Pennsylvania - Wharton Financial Institutions Center

Date Written: December 19, 2017

Abstract

The beta anomaly — negative (positive) alpha on stocks with high (low) beta — arises from beta’s positive correlation with idiosyncratic volatility (IVOL). The relation between IVOL and alpha is positive among underpriced stocks but negative and stronger among overpriced stocks (Stambaugh, Yu, and Yuan, 2015). That stronger negative relation combines with the positive IVOL-beta correlation to produce the beta anomaly. The anomaly is significant only within overpriced stocks and only in periods when the beta-IVOL correlation and the likelihood of overpricing are simultaneously high. Either controlling for IVOL or simply excluding overpriced stocks with high IVOL renders the beta anomaly insignificant.

Keywords: beta anomaly, IVOL anomaly, investor sentiment

JEL Classification: G12, G14

Suggested Citation

Liu, Jianan and Stambaugh, Robert F. and Yuan, Yu, Absolving Beta of Volatility's Effects (December 19, 2017). Journal of Financial Economics (JFE), Volume 128, Issue 1, April 2018, Pages 1-15, Available at SSRN: https://ssrn.com/abstract=2834365 or http://dx.doi.org/10.2139/ssrn.2834365

Jianan Liu

University of Pennsylvania, The Wharton School, Students ( email )

3641 Locust Walk
Philadelphia, PA 19104
United States

Robert F. Stambaugh

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
University of Pennsylvania
Philadelphia, PA 19104-6367
United States
215-898-5734 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yu Yuan (Contact Author)

Shanghai Mingshi Investment Company ( email )

488 M Yincheng Road
Shanghai
China

University of Pennsylvania - Wharton Financial Institutions Center

3733 Spruce Street
Philadelphia, PA 19104-6374
United States

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