Overconfidence, Sentiment and Beta Herding: A Behavioral Explanation of the Low-Beta Anomaly

55 Pages Posted: 15 Aug 2018

See all articles by Soosung Hwang

Soosung Hwang

Sungkyunkwan University - Department of Economics

Alexandre Rubesam

IESEG School of Management; French National Center for Scientific Research (CNRS) - Lille Economie & Management (LEM) UMR 9221

Mark Salmon

University of Cambridge - Faculty of Economics and Politics

Date Written: August 1, 2018

Abstract

We investigate asset returns using the concept of beta herding, which measures cross-sectional variations in betas induced by investors whose beliefs about the market are biased due to changes in confidence or sentiment. Overconfidence or optimistic sentiment causes beta herding (compression of individual assets’ betas towards the market beta), while under-confidence or pessimistic sentiment leads to adverse beta herding (dispersion of betas away from the market beta). We find that beta herding is related to the low-beta anomaly, as high beta stocks underperform low beta stocks on a risk-adjusted basis exclusively following periods of adverse beta herding. As an explanation of the low-beta anomaly, we propose the persistence of bias in betas (i.e., a large difference in betas) that lasts for more than one year as market uncertainty continues.

Keywords: Beta, Herding, Overconfidence, Sentiment, Low-beta Anomaly

JEL Classification: C12, C31, G12, G14

Suggested Citation

Hwang, Soosung and Rubesam, Alexandre and Salmon, Mark Howard, Overconfidence, Sentiment and Beta Herding: A Behavioral Explanation of the Low-Beta Anomaly (August 1, 2018). Available at SSRN: https://ssrn.com/abstract=3224321 or http://dx.doi.org/10.2139/ssrn.3224321

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)

Alexandre Rubesam

IESEG School of Management ( email )

Socle de la Grande Arche
1 Parvis de la Defense
Puteaux, Paris 92800
France

French National Center for Scientific Research (CNRS) - Lille Economie & Management (LEM) UMR 9221 ( email )

Lille
France

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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