71 Pages Posted: 14 May 2020 Last revised: 14 Jan 2021
Date Written: April 20, 2020
A stock's exposure to systematic risk factors is surrounded by substantial uncertainty. This beta uncertainty is both economically and statistically significantly priced in the cross-section of stock returns. Stocks with high beta uncertainty substantially under-perform those with low beta uncertainty: a two-standard-deviation increase in the measure decreases average annual returns by 9.7%. These results cannot be explained by previously discovered determinants of cross-sectional stock returns. Aggregate beta uncertainty negatively predicts market excess returns in the short and medium term. We find supporting evidence for a mis-pricing explanation of the beta uncertainty premium.
Keywords: Beta, CAPM, Disagreement, Ambiguity, Parameter Uncertainty
JEL Classification: G12, G11, G17
Suggested Citation: Suggested Citation