61 Pages Posted: 11 Feb 2002 Last revised: 27 Feb 2017
Date Written: February 27, 2017
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: Suggested Citation