Download This PaperAbsolving Beta of Volatility's Effects
Journal of Financial Economics (JFE), Volume 128, Issue 1, April 2018, Pages 1-15
Jacobs Levy Equity Management Center for Quantitative Financial Research Paper
37 Pages Posted: 7 Sep 2016 Last revised: 11 Aug 2020
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: Suggested Citation
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)
University of Pennsylvania - Wharton Financial Institutions Center
3733 Spruce Street
Philadelphia, PA 19104-6374
United States