Overconfidence, Sentiment and Beta Herding

61 Pages Posted: 11 Feb 2002 Last revised: 27 Feb 2017

Soosung Hwang

Sungkyunkwan University - Department of Economics

Mark Salmon

University of Cambridge - Faculty of Economics and Politics

Date Written: February 27, 2017

Abstract

We investigate the effects of investor sentiment and overconfidence about market outlook on asset returns using the concept of beta herding that measures the cross-sectional shrinkage in betas induced by investors who suppress their own beliefs concerning individual assets. We find that high beta stocks outperform low beta stocks during adverse beta herding periods when there is a large difference between high and low betas whereas beta does not matter when the difference between betas is less distinct. Contrary to common belief, investors seek out the risk-return relationship during crises rather than follow the market disregarding the relationship.

Keywords: Beta, Herding, Overconfidence, Sentiment, Market Crises, Cross-sectional asset returns

JEL Classification: C12, C31, G12, G14

Suggested Citation

Hwang, Soosung and Salmon, Mark, Overconfidence, Sentiment and Beta Herding (February 27, 2017). Available at SSRN: https://ssrn.com/abstract=299919 or http://dx.doi.org/10.2139/ssrn.299919

Soosung Hwang (Contact Author)

Sungkyunkwan University - Department of Economics ( email )

25-2 Sungkyunkwan-ro
Jongno-Gu
110-745 Seoul
+82 (0)2 760 0489 (Phone)
+82 (0)2 744 5717 (Fax)

Mark Howard Salmon

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

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