Investor Overconfidence and the Security Market Line: New Evidence from China

62 Pages Posted: 27 Nov 2018 Last revised: 18 Jun 2020

See all articles by Xing Han

Xing Han

University of Auckland Business School

Kai Li

Macquarie Business School, Macquarie University

Youwei Li

Hull University Business School

Date Written: December 29, 2019

Abstract

This paper documents a highly downward sloping security market line (SML) in China, which is more puzzling than the typical “flattened” SML in the US, and does not reconcile with existing theories of low-beta anomaly. We show that investor overconfidence offers some promises in resolving the puzzle in China: In the time-series dimension, the slope of the SML becomes more “inverted” when investors get more overconfident. This dynamic overconfidence effect is intensified with biased self-attribution. As a general symptom of overconfidence in the cross section, high-beta stocks are also the mostly heavily traded. After accounting for trading volume, there is no longer the low-beta anomaly at both the firm and portfolio levels. Mutual fund evidence reinforces the view that institutional investors actively exploit the portfolio implications of a downward sloping SML by shying away from high-beta stocks and betting on low-beta stocks for superior performance.

Keywords: Beta Anomaly, Betting Against Beta, Overconfidence, Trading Volume, Mutual Fund

JEL Classification: G11, G12, G15, G40

Suggested Citation

Han, Xing and Li, Kai and Li, Youwei, Investor Overconfidence and the Security Market Line: New Evidence from China (December 29, 2019). Macquarie University Faculty of Business & Economics Research Paper, Available at SSRN: https://ssrn.com/abstract=3284886 or http://dx.doi.org/10.2139/ssrn.3284886

Xing Han

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

Kai Li

Macquarie Business School, Macquarie University ( email )

Level 6 4 Eastern Road, Macquarie University
North Ryde NSW 2109
Sydney, NSW 99999
Australia
435473800 (Phone)

Youwei Li (Contact Author)

Hull University Business School ( email )

University of Hull
Hull, HU6 7RX
United Kingdom

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