Uncertainty and the Beta Anomaly

62 Pages Posted: 28 Feb 2022

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: February 18, 2022

Abstract

Using various indices of economic and financial uncertainties, we document a new stylized fact about the beta anomaly: the negative relation between beta and alpha exists in low-uncertainty periods but not in high uncertainty periods. We show that this finding cannot be explained by sentiment, lottery preference, coskewness risk, or funding constraints. We hypothesize that high uncertainty reduces investors’ appetite for high-beta stocks, which increases their expected returns and restores the CAPM relation. Consistent with this hypothesis, mutual fund flows are negatively related to fund beta when uncertainty is high, and trade-induced changes in market risk exposure of actively-managed funds are negatively correlated with uncertainty. Furthermore, the negative beta-alpha relation is attenuated by firm-level uncertainty.

Keywords: Uncertainty; ambiguity; beta anomaly; stock returns

JEL Classification: G12; G14

Suggested Citation

Cao, Zhiqi and Wu, Wenfeng and Wu, Youchang, Uncertainty and the Beta Anomaly (February 18, 2022). 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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