59 Pages Posted: 11 Feb 2002 Last revised: 15 Sep 2017
Date Written: February 27, 2017
We investigate the effects of behavioral biases on asset returns using the concept of beta herding that measures the cross-sectional shrinkage in betas induced by investors’ sentiment and overconfidence about the overall market outlook. Beta herding becomes apparent when investors are optimistic or overconfident regarding the future direction of the market whereas adverse beta herding arises (the dispersion of betas increases) once a crisis appears and uncertainty increases. It is following adverse beta herding periods when high beta stocks underperform low beta stocks, and thus the low beta anomaly disappears when adverse beta herding is considered. We demonstrate that the effects of beta herding on beta-sorted portfolios are different from those of sentiment, and that the effects are quite persistent, lasting more than two years.
Keywords: Beta, Herding, Overconfidence, Sentiment, Market Crises, Low-beta Anomaly
JEL Classification: C12, C31, G12, G14
Suggested Citation: Suggested Citation