Economic Uncertainty and the Beta Anomaly

77 Pages Posted: 28 Feb 2022 Last revised: 8 Jan 2024

See all articles by Zhiqi Cao

Zhiqi Cao

Shanghai Jiao Tong University (SJTU)

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management

Youchang Wu

University of Oregon - Lundquist College of Business

Date Written: September 05, 2024

Abstract

Using various measures of economic uncertainty, we find that the beta-alpha anomaly exists only during periods of low economic uncertainty. We argue that diminished risk appetite during high economic uncertainty eases leverage constraints of typical long-only investors, making overvaluation of high-beta stocks less likely. Differences in uncertainty-related beta trading activities between mutual fund investors/managers and hedge funds support this explanation. Variation of the beta anomaly within the low-uncertainty state further corroborates it: The anomaly is more pronounced among stocks heavily held by investors who are more likely to be leverage constrained, and concentrated in the subperiods in which leverage constraints for typical long-only investors are likely to be more severe.

Keywords: Economic uncertainty; ambiguity aversion; asset pricing anomaly; leverage constraint, mutual fund, hedge fund

JEL Classification: G12; G14

Suggested Citation

Cao, Zhiqi and Wu, Wenfeng and Wu, Youchang, Economic Uncertainty and the Beta Anomaly (September 05, 2024). Available at SSRN: https://ssrn.com/abstract=4034987 or http://dx.doi.org/10.2139/ssrn.4034987

Zhiqi Cao

Shanghai Jiao Tong University (SJTU) ( email )

KoGuan Law School
Shanghai 200030, Shanghai 200052
China

Wenfeng Wu (Contact Author)

Shanghai Jiao Tong University - Antai College of Economics & Management ( email )

No. 1954 Huashan Road
Shanghai, Shanghai 200030
China

Youchang Wu

University of Oregon - Lundquist College of Business ( email )

1280 University of Oregon
Eugene, OR 97403
United States

HOME PAGE: http://www.youchangwu.com

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